You have a brilliant idea, some early traction, and are now considering venture funding. How should you go about this and what do the most successful entrepreneurs in Europe do?
As the host of The European Startup Show, I’ve interviewed dozens of successful entrepreneurs who have collectively raised £1B+, and spoken with tier one investors who have backed some of the most notable exits in Europe.
In case you don't have the time to listen to podcasts or podcasts are not your thing, I have created this cliff notes version with tips on when to raise, how to raise, and the most common mistakes entrepreneurs make.
So let’s get to it...
The three most important milestones in a young startup’s life are:
- Positive unit economics
- Predictable growth
Unless you’re an established entrepreneur, you’re likely going to fundraise only after product-market-fit - i.e. you have users or customers who are in love with your product/service and enthusiastically recommend it.
Should you fundraise at this point so you can acquire customers more quickly? After all, first-mover advantage is sometimes key in winner-take-all markets.
Or maybe you should wait till you have de-risked more - develop the product, get a few more customers or have better traction metrics?
Here is what the experts advise:
Pro Tip #1: Have a plan and show execution proof
Jonathan Cherki, Founder and CEO of ContentSquare, went from bootstrapping his company on £400k to raising £20M then £42M and then £190M. He said before each raise, they not only had a plan for what they would do with that money, but they had proof and had started executing on that plan. For example, they had expanded from France to the UK before they raised their next round to expand to the US.
Pro Tip #2: Go to VCs to raise money when you ready to scale to get the best possible outcome
Christina Fonseca, Founder of Cleverly says “VC funding is amazing for when you are in a growth trajectory or you have a base that, you know, can scale.”
Cristina should know. She is a VC at Indico Capital Partners and before Indico was co-founder and CEO of Talkdesk, one of the early unicorns of Portugal that raised $100M in Series B funding. So Cristina knows both the VC and entrepreneur perspectives well.
Fonseca emphasizes that entrepreneurs should only “raise VC money when they are prepared and when have good metrics to have a successful VC trajectory.”
In general, the consensus from the entrepreneurs is to be more prepared, de-risk as much as possible, and have a plan before you fundraise.
The most agonizing part for most entrepreneurs is getting the pitch and story right for their fundraising.
Let’s face it - you love talking about your product and how it is going to help your customers.
But how do you get that across in a way that is going to blow the VC’s mind away?
What does the perfect pitch have?
Pro-tip: Paint the vision of how your company will look at IPO
According to Tim Sadler, Co-Founder, and CEO of Tessian:
“You've got to articulate what you're building as something bigger than the product itself today. He says if the team at Notion were pitching their product, they would not say it's kind of like Google docs, but you can link things deeply in the platform with gifs and other integrations. The story of Notion would be telling will be closer to building the future of enterprise workspace, a completely new category of tools.”
To make it real, Sadler advises companies to think of what their Wikipedia entry or S1 filing will be at the time of IPO. Paint a picture for the VC of how your company will be at scale.
Assuming that you have the product, the team, and the metrics to show VCs, the most important difference between a successful fundraise vs an average fundraise is the story. The best VCs have seen successful companies that go on to exit or IPO and know the patterns to look for in early-stage pitches.
The hard part of preparation is done. Now the fun part: meeting VCs and getting term sheets.
What’s the right approach to finding the right VCs? Do cold calls or emails or contact us forms on the VC website actually work? Is there any such thing as the right VC?
Tip #1: Spend more time getting intros from people who can vouch for you vs in accelerators
Jon Evald, Founder and CEO of Garden cautions against early-stage startups spending most of their time in networking sessions organized by accelerators and incubators which are good but are harder to attract investors when there are several startups all vying for the attention of the investors. Instead “find someone who can vouch for you and will introduce you to investors”, says Evald, who raised a million dollars in his early stage. “You will be received completely differently”
Tip #2: Find a VC who has already been thinking about your space and problem.
It is a right of passage to be rejected more often than it is to get a second call or meeting. But that may not be because of something you don’t have. According to Jan Hugenroth, Founder and CEO of Next Matter, you need to shift your mindset about what the right VC is first.
Hugenroth says that the right VC has been thinking about this problem space for a long time and understands what the opportunity is. The right VC does not need convincing of the problem set. They need to be convinced that you will win in this market.
Maybe you are in a good position to pick among a few VCs who are interested. Or maybe you have just one VC to consider.
What should you ask? How do you determine the right VC?
According to Ciaran O’Leary, Co-Founder, and General Partner at BlueYard Capital, even if you just have one VC that wants to invest, you must do your due diligence. This relationship is critical for you in accomplishing your goals so you want to do your homework just as much as the VC does theirs.
Here are some of the questions you should be asking according to O’Leary:
First, consider the partner you are dealing with -
- Are they a partner or a GP that can deliver the firm? Can they actually make commitments and aren’t afraid of being fired?
- Is this somebody who you think might be there for seven to 10 years or however long it takes to make you successful?
- Is this a person you like or respect? Is this somebody you can imagine working with, on good days and bad days? Can you get into a terrible argument and then be friends again?
Then looking at the firm itself -
- Is it a healthy, well-capitalized firm that has a good reputation for how they treat founders during bad times?
- Look at the portfolio of the VC firm and ask yourself if this is the family you want to be part of. O’Leary believes that can tell you so much more than the bullet points written on the website.
- Lastly, does this firm have a track record of being associated with companies that have raised a lot more money and have gone places, and do they have good relationships with other investors.
O’Leary charges entrepreneurs to:
“Ask for references and call references that aren't on their sheets; ask them when they raised their last fund; ask them how much fresh money is left. Ask them if that partner has any say in the investments committee, you know, go there. They're asking you lots of questions. You should be able to ask lots of questions back.”
Before I end, I also wanted to include what entrepreneurs or VCs said were the most common mistakes they saw.
According to O’Leary the biggest mistake he sees entrepreneurs make is not having clarity on what they are and what they aren’t. This lack of clarity is evident in the story the entrepreneur pitches. “When you are clear, your story is simple: when you are not, the story is made overly complicated”, says O’Leary.
The second most common mistake is in finding the right size of amount to raise. Do your homework and have a plan for what you are going to use the money for. The worst thing you can do is to change your target goal mid-way through your fundraising. If you are not sure, have a range. That’s better than confidently pitching and then changing the goal post.
Finally, don’t go to your ideal VCs first. Choose a small group of VC to test out your messaging and your value proposition, fine-tune your story based on their feedback, and then go to your dream VCs.
These are some of the top tips but there are a lot more. I know how important funding is and I ask about funding in almost all the episodes.
What else would you like to hear me ask entrepreneurs and VCs to help you in your funding journey? What else have you seen work or not work when it comes to funding?
For more stories and tips on how to build and scale your company, check out the other episodes.
You can also subscribe to my email list where I will be regularly sending out content - new episodes or blogs like this one.