How a UK rating agency aims to increase the flow of qualified leads to VCs

If you’re a VC, how do you find the next generation of UK startups?

Those who want to take the easy option can start by looking at well-established technical centers. After all, you can’t go wrong by looking to the shared workspaces of London, Manchester, Bristol or Cambridge for talent.

You can narrow things down by focusing on a few hot sectors and ask your network for examples of founders doing interesting things. Undoubtedly, your search will bring up some promising candidates, some of whom you may invest in.

But are you missing? If you look at the usual niches and see founders who are well-networked enough to find their way onto investor radar screens, are you overlooking innovators from small towns, ethnic minorities or backgrounds who sit outside the usual socio-economic catchment areas? What you might call unknown companies. While there are plenty of women who are starting and growing good companies, do you find yourself talking mainly to men?

In other words, can you limit the size of your fishing pool with the narrowness of your network and some unconscious bias?

Well, maybe so. But even if a VC is eager to search for investment opportunities from the widest possible range of sources, it is impossible to find enough time to evaluate and filter a large number of promising companies. It’s best to stick to regular channels, even if a few opportunities go unnoticed.

 

Capital Pilot Founder, Richard Blakeslee believes he has the answer to this dilemma. Originally an investment banker, he seeks to provide high-quality startups with a way to find investors, while at the same time pitching qualified prospects to VCs and angels.

Investment appraisals

Capital Pilot is essentially a rating agency. Early-stage companies upload their company profiles – including pitch decks – and the capital pilot provides a detailed feedback on investment valuation – and potential improvements – within days. The idea is for startups to use the service before embarking on the funding journey. Feedback can help VCs address and fix issues that are red flags. About 2,500 companies have been assessed to date.

“If you have a high rating, it’s proof that you’ll close your next fundraiser,” says Blakeslee. “If you have a low estimate, you won’t.” In addition to valuation, the company also helps match good startups to investors.

But let’s back up for a second. It’s a service for VCs and angels, but of course they’re more adept at valuing companies for themselves. After all, they are an industry with their own criteria. Blakesley says the capital pilot provides a quality control filter over a wide range of potential investments. Equally important, he says, is that assessments are comprehensive and systematic. “A VC will say he wants a good team. How do you know what a good team looks like? We break down all the elements that make a good team,” he exemplifies.

A large pond

So what effect will this have on the market? Blakesley says a byproduct of CapitalPilot’s approach is expanding the founder talent pool. The rating system identifies companies that are struggling to get an inquiry. “Our rating system looks for companies that VCs don’t normally look at,” he says.

This, he argues, leads to more diversity. More companies from outside the core centers have more female leaders and a significantly higher percentage of founders are from ethnic minorities.

Everything is fine. But as useful as the rating system is, it will only reach its full potential if VCs sit up and take notice. Blakeslee admits Capital Pilot is on a journey with the VC and angel community. “You’ll have fund managers who resist any system that questions their own expertise, the expertise that fund managers sell,” he says.

Fund managers, on the other hand, adopt a system that provides qualified contract flow, he says.

Boost

Later, Capital Pilot added to its offering by creating a £5 million boost fund. It is open to highly rated companies passing through its system. Those who score appropriately can secure up to £50,000 in pre-rated cash. Startups can seek additional funding elsewhere.

The fund — which has made 100 allocations — says the capital pilot approach actually results in greater diversification. Forty per cent of those who have accessed Boost Fund cash are from outside London, a similar percentage have BAME founders and 50 per cent are led by women. A Boost Fund 2 is planned.

More than 70 percent of the companies that presented themselves for rating participated in accelerator programs. It suggests that these startups did not emerge out of thin air. They have already started making their presence felt within the startup ecosystem.

Looking to the future, Blakeslee hopes to increase funding available to early-stage businesses. By generating a pool of qualified leads, he aims to attract company money. “We want to create a new system where companies like legal and public can invest,” he says.