Alliott Cole
It’s no secret that investors fight head over heels for sizzling deals and promising entrepreneurs to increase odds of success and potential returns. But when demand for quality deals exceeds supply, you better come up with exclusive, creative, or effective ways to lure the Steve Jobses of tomorrow.
How to compete for hot deals? Are startup competitions a source of quality deal flow? What are the key terms to negotiate?
From deal sourcing and picking winners to negotiating terms, Alliott Cole of Octopus Ventures shares his perspectives with Venture Hype.
Alliott Cole is an associate director at Octopus Ventures (@OctopusVentures) and a director at the British Business Angel Association (BBAA). He’s a broad member of several startups and he devotes his time advising and discovering promising entrepreneurs at the University of Oxford society Oxford Entrepreneurs.
Octopus Ventures is an award-winning early-stage investing firm in the United Kingdom. Its model is unique in that it prefers to back exceptional entrepreneurial teams rather than specific sectors, and co-invests with a private investor group, Octopus Venture Partners, in every investment. The group of private investors is made up of 110 scientists, entrepreneurs, businessmen, and leaders of commerce who can add value to the companies they back.
* Edited interview
VH: How does Octopus Ventures source quality deals?
AC: Most entrepreneurs — around 4,000 companies each year — come to Octopus Ventures directly or are referred to us via the Octopus Venture Partners group. We also receive many introductions via corporate financiers and other venture capital houses.
In addition, I’ve been running monthly “Open Office” sessions in Oxford for undergraduate entrepreneurs and MBA students in the last 2 years. Similar sessions are also held periodically at our London office.
We also actively reach out to entrepreneurs through panels, conferences, and networking events.
VH: Competition is fierce for hot deals. How should investors position themselves as the most suitable/preferred investors for such deals?
AC: Not an easy question to answer!
At Octopus Ventures we look to build enduring relationships with entrepreneurs and to continually help their businesses in as many ways possible.
In competitive situations, we always ask the entrepreneur to do his or her own due diligence on Octopus. We encourage them to speak to the businesses we’ve partnered with in the past. We hope this will give a candid and accurate picture of Octopus and our modus operandi.
As to how should other investors position themselves as the most suitable investor for a deal, I think it comes down to building a strong, equal, and open relationship with the entrepreneur; communicating clearly at every stage of the negotiation; and demonstrating a proven ability to add value to growing businesses.
VH: You also judge startup competitions like the Innovate!100 competition held in March. What do you think of this type of deal flow?
AC: I love meeting entrepreneurs. Their enthusiasm and conviction is inspiring and infectious. If you add in the pressure and expectation of a pitching competition, you often witness something very special.
I’m always impressed by entrepreneurs who can thrive in this environment, articulating their proposition concisely and with force. I think these events provide a great source of deal flow for investors. I try to attend them as often as possible.
VH: What do you look for in the businesses you invest in?
AC: For the most part, Octopus invests in companies that have revenues but may not be beyond breakeven.
We believe that the team is the single most important factor. We look for effective, inspiring individuals who can infect those around them with excitement and passion of their proposition.
Second to this, we look for companies that can scale quickly into big businesses addressing large markets.
Finally, these companies must resonate with the Octopus Venture Partners group.
To this end, the business must be simple to understand, has a product or service of value, with a clear route to market and a defined customer.
VH: How does the negotiation process work?
AC: Octopus Ventures looks to build strong partnerships with entrepreneurs from the outset and the negotiation process is a critical element of this.
We provide detailed and lengthy heads of terms so that the entrepreneur can negotiate all of the critical terms of an investment at the same time — before committing his or her business.
Someone once described this process as moving in ever decreasing circles until both parties come together at an agreed focal point. We like to do this face to face and in an open and frank manner.
If the process becomes too difficult, we’ll agree to disagree and step away from the negotiation. It’s not in the interest of the entrepreneur or Octopus to force a partnership if either party isn’t directly aligned with the other.
VH: From an investor’s perspective, what are the key terms to negotiate? Why?
AC: The valuation of the business and structure of the investment are key terms.
It’s critical for all stakeholders in a business to negotiate terms that aren’t only fair and workable for the present but also for the future.
Early-stage companies often require several rounds of finance. Entrepreneurs and investors should be careful not to agree to terms that might make the business unattractive for follow-on investment (e.g. unrealistic first round valuations; complex distribution rights; ratchets and/or anti-dilution provisions) or misalign stakeholders when there are key strategic decisions to be agreed (e.g. on an exit).
It’s also important to strike the right balance on governance and ensure that nothing will prohibit efficient decision-making and action.
VH: Entrepreneurs and investors often disagree on valuation. How do you go about negotiating a realistic valuation with these entrepreneurs?
AC: Investment structures like ratchets and distribution preferences can be used to bridge these gaps, but they run the risk of misaligning the stakeholders in the business. And such structures may lead to bigger problems at a later stage.
With this in mind, a frank and fair agreement is always preferable but there’s no quick and easy route to arrive at this outcome.
* For series, references are published in the last installment of the series.
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