How a UK Rating Company Aims to Increase the Flow of Qualified Leads to VCs

If you are 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 tech hubs. After all, you won’t go wrong browsing the coworking spaces of London, Manchester, Bristol or Cambridge in search of talent.

Then you can narrow things down by focusing on a few hot areas and asking your network for examples of founders doing cool things. Undoubtedly, your search will lead to promising candidates and you might even invest in some of them.

But are you missing something? If you look in the usual places and find founders who are well-connected enough to end up on investors’ radar screens, could you overlook innovators from small towns, ethnic minorities, or backgrounds that are outside the hotspots? usual socio-economic catchment? Companies you might call the unknown unknowns. And will you perhaps find yourself talking mostly to men, even though there are plenty of women who are starting and growing good businesses?

In other words, could the narrowness of your network coupled with certain unconscious biases limit the size of the pool you fish in?

Well, maybe yes. But even if a VC wants to seek investment opportunities from the widest range of sources possible, it may not be possible to find enough time to assess and screen more promising companies. It may be best to stick with the usual channels, even if it means a few opportunities will be overlooked.

Capital Pilot founder Richard Blakesley believes he has an answer to this dilemma. Originally an investment banker, he seeks to provide high-quality startups with a means to find investors while providing VCs and angels with a wider pool of suitably qualified leads.

Investability Ratings

Capital Pilot is essentially a rating company. Early-stage companies upload their business details – including pitch decks – and Capital Pilot will provide an investment score – along with detailed feedback on what can be improved – within days. The idea is that startups should use the service before embarking on a funding journey. Feedback will help them address and resolve issues that might be red flags for VCs. To date, approximately 2,500 companies have been rated.

“The proof is that if you have a high rating, you will complete your next fundraiser,” Blakesley says. “If you have a low grade, you won’t.” In addition to scoring, the company will also help match good startups to investors.

But let’s back up for a second. It’s also a service for VCs and angels, but they’re surely quite capable of evaluating companies on their own. They are industry insiders with their own criteria, after all. Blakesley says Capital Pilot provides a quality control filter across a wide range of potential investments. Equally important, he says the assessments are comprehensive and systematic. “A VC will say they want 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 says as an example.

A bigger swimming pool

So what effect could this have on the market? Well, Blakesley says one of the byproducts of Capital Pilot’s approach is a broadening of the founders’ talent pool. The rating system identifies companies that might otherwise struggle to gain an audience. “Our rating system looks for companies that VCs wouldn’t normally see,” he says.

This, in turn, leads to more diversity, he argues. More companies outside major centers, more women leaders and a significantly higher percentage of founders are from ethnic minorities.

Everything is fine. But no matter how effective the rating system is, it will only reach its full potential if VCs sit up and take notice. Blakesley acknowledges that Capital Pilot is on a journey with the VC and Angel community. “You will have fund managers who will oppose any system that challenges their own expertise. Expertise is what fund managers are selling,” he says.

On the other hand, he says that fund managers are receptive to a system that offers qualified deal flow.

The helping hand

Recently, Capital Pilot completed its offering with the creation of a £5 million Boost fund. It is open to highly rated companies going through its system. Those with a suitable score can get £50,000 in pre-assessment money. Startups can then seek additional funding elsewhere.

The Fund – which has made 100 allocations – suggests that the capital pilot approach is indeed resulting in greater diversity. Forty per cent of those who accessed cash from the Boost Fund are based outside of London, a similar percentage have BAME founders and 50 per cent are led by women. A Boost Fund 2 is planned.

That said, more than 70% of the companies that applied for the rating took part in acceleration programs. This suggests that these startups are not coming out of thin air. They have already started to make their presence felt within the startup ecosystem.

Looking ahead, Blakesley hopes to increase the pool of funds available to start-ups. By creating a pool of qualified prospects, it aims to attract institutional cash. “We want to create a new system that institutions like Legal & General can invest in,” he says.