Exploring the Venture Capital Advisory Industry

by Greg Barton, MBA at Durham University Business School

Entrepreneurship is a growing industry, both in the UK and overseas (especially in emerging markets, where the rate of start-up growth is up to around 40 times faster than in developed countries). However, whilst growing numbers of people are interested in becoming entrepreneurs, research suggests only a minority felt they have the necessary skills, knowledge and experience to do so. In recent years, around a third of UK start-ups failed in the first three years, more recently, research has highlighted that 20% of the failed companies would have still been in business 2.5 years later if they had taken advice at the outset. Expertise and finance have been emphasised repeatedly as key factors to helping small businesses survive and grow.

Throughout summer 2013, I worked with Amoo whilst writing my MBA business project. Venture capital advisory work is a relatively new sector and my research involved looking at what services potential clients may be interested in, the factors that they value and how they go about choosing firms to work with. I did this by launching an online survey, to identify high-level trends between factors, and carried out a smaller number of interviews to look at entrepreneurs’ views in more detail.

The entrepreneurs' sampled ranged by location, industry, size and level of experience; they were interested in a wide range of services. Assistance with capital raising was seen as the most important, followed by business planning assistance and advice on investment readiness. The fact that there was much more interest in fundraising assistance than in advisory work suggests that some entrepreneurs may undervalue the importance of advisory work (consistent with the research mentioned at the start of this article).

When working with consultants, the majority of entrepreneurs stated that they would prefer to work with industry specialists and that they valued specialist industry knowledge more highly than whether consultants had worked with small businesses or start-ups before. This shows the importance of advisors being industry experts – and of targeting a particular sector (such as the Technology, Media and Telecommunications sector) to work in. The majority of entrepreneurs stated that they would look at track records and reputations as the most important factors when choosing consultants to work with, although price is of course an important factor and can be used to narrow down potential consultants before looking in more detail at other factors.

The majority of entrepreneurs sampled expected to pay under £5,000 for advisory work and up to around 4%-6% commission for fundraising assistance. However, this varied based on factors such as the range of services that entrepreneurs were interested in, as well as the stage that they were at with their start-up. There was a strong positive correlation between a start-up’s revenue and the level of fees that they would be prepared to pay for advisory work. There was also a range of preferences for payment terms: only around a quarter of entrepreneurs were prepared to pay for advisory work at the time the work is carried out (largely due to cashflow issues, with entrepreneurs not being willing or able to spend their funds on advisory services until they had achieved fundraising): the majority preferred to wait until they had achieved fundraising before paying for advisory work. There was a strong level of interest in converting advisory fees into an equity stake in entrepreneurs’ start-ups – similarly, this avoided cashflow problems for entrepreneurs.

Among the entrepreneurs surveyed, there was a strong overall preference for working with third-parties based in London rather than overseas. This is due to a combination of reasons: firstly, a high proportion of entrepreneurs surveyed were based in the UK and so they may find it logistically simpler to work with UK-based third-parties. Many entrepreneurs also highlighted that, given that they are looking for investors, consultants based in a location where there are many potential investors (such as in the UK or USA) would be preferable. London’s reputation as a key financial centre appealed to many entrepreneurs. Indeed, the responses suggested that entrepreneurs would be willing to pay higher fees to work with consultants or fundraisers based in the UK or USA than in other locations.

Overall, entrepreneurship is a growing sector internationally. There are a range of services which are of interest to entrepreneurs, with a particular emphasis on fundraising assistance. When choosing firms to work with, many entrepreneurs focused on track records and industry expertise, highlighting the importance of knowledge and expertise for firms operating within the industry.