The conventional wisdom runs something like this. The process of raising capital is time-consuming and stressful. It diverts the attention of managers from more important matters, such as driving product development or making sales. Ideally, every funding round should provide a financial runway of 15 to 18 months to allow teams to get on with their day jobs rather than spending all their time worrying about what would happens should the money runs out.
Andrew Jenkins doesn’t necessarily agree. A co-founder of venture capital fund, Conviction VC, he is a proponent of an investment strategy based on milestones. Rather than providing early-stage businesses with a large amount of capital upfront, his fund invests smaller amounts on a regular basis, with the release of additional capital triggered by the companies in question hitting their revenue targets. This could mean new funding events every year.
So other than helping Conviction VC to manage its own risk, is this approach to funding a good idea for founders? When I spoke to Jenkins in the dying days of January 2023, I was keen to get his take on why milestone investing might be founder friendly.
The Long Haul
Jenkins, originally an asset manager, began his VC career with an investment in email management and cybersecurity company Mimecast back in 2001. As he explains, his approach was to create a syndicate of investors that would support the business over the long term. “The journey with Mimecast lasted 17 years,” he says.
Conviction VC itself was created – or formalized – in 2017 with Jeremy Middleton as co-founder. To date, it has invested in more than 20 companies with a focus on software-as-a-service in the business-to-business market.
The company’s thesis originates in the Mimecast investment. Not only did that provide Jenkins with first-hand experience of how a cloud-based business can be grown successfully, it also led him to conclude that SaaS businesses are eminently scalable. “If you can dominate in one market it is very easy to roll that out internationally,” he says.
The Mimecast experience also helped to formulate the milestone investment strategy for Conviction VC.
Smaller Funding Rounds – A Good Idea?
“We like to do small funding rounds. We invest for 12 months and then we will invest again as long as the company hits the numbers,” he says.
Jenkins stresses that Conviction VC puts founders first. But doesn’t the process of locking early-stage businesses into short runways actually achieve the opposite? I put it to Jenkins that it might simply create constant stress.
It depends on the company and its situation, he says. Jenkins stresses that Conviction VCs portfolio companies are post-revenue. They are making money now, rather than investing in the development of technology that might pay off at some point in the future. The latter, he says, do require investments with longer runaways. But in the case of post-revenue companies, the dynamic is different. Because Conviction knows its portfolio and how the companies within it are performing, it will continue to invest when new funds are needed. The investment process isn’t protracted.
“With post-revenue companies, you don’t need to roll the dice and go for a massive revenue raise.”
Holding On To Equity
But is that necessarily a positive? Well, Jenkins argues that founders can get locked into a scenario where they surrender more equity is necessary and find themselves with valuations that – as he puts it – they have to grow into. “That can be dangerous,” he says. Smaller investments – which may begin with a convertible loan arrangement – keep the equity in the hands of the founders, at least initially.
Of course, there are always decisions to be made about these matters and convertible loan arrangements have their pros and cons. The bigger point is, perhaps, that Conviction says its approach to investment facilitates long term – “patient” finance when required.
To date, Conviction has invested more than $100 million. Current portfolio companies include cyber security business Culture AI and CreativeX a platform that applies AI to to the management of brand collateral.
As a point of principle, Jenkins says he would encourage founders to start their journey with money from “friends and family” before perhaps moving on to a convertible loan deal ( debt convertible to shares). Success at these stages will make it easier to negotiate equity deals at a later stage.
I spoke to Jenkins at a time when there are some -hopefully – short-term question markets hanging over the VC investment space both here in the UK and globally.
According to the latest KPMG Venture Pulse report, 2022 was not a vintage year. In the third quarter, global investment fell to $45 billion compared with $76 billion in the previous three-month period. It was, apparently, a similar story across all major jurisdictions. Looking ahead, the report warns that as investors become more conservative, Seed and Series A-stage companies are likely to struggle to find investment. A good time, for startups to consider alternative strategies.