There has recently been much talk of European seed-stage investment drying up. Research from Plexal and Beauhurst revealed that first-time funding for UK startups fell by 83% from March to May this year.
Seeing how our fund is currently Europe’s most active VC, I thought I’d give founders some insight into the current fundraising climate, and spread the good news: things are not as dire as they might seem.
Despite the current economic climate, our investment strategy has remained the same. We focus on early-stage startups, and we find that if the business fundamentals are strong — a great team, a strong market, and a viable product — then we have a compelling investment option. This is especially true if teams have shown an ability to shift focus and adapt in order to thrive in the face of changing business conditions.
Given the current caution many entrepreneurs say they are encountering when talking to investors, here are some tips for early-stage founders, based on the experiences of my team here at Speedinvest, on how to nail fundraising during these trying times:
Have a realistic outlook
What I want to see from businesses that approach me is a realistic appraisal of market conditions. When it comes to the current downturn, for example, that means I’d prefer founders coming to me to work with the assumption that the market isn’t necessarily going to recover rapidly.
Right now, I don’t want to see companies planning around the best case scenario, as that can affect your ability to be resilient to economic shocks outside of your control. Instead, I advise companies to act conservatively and prove their business has what it takes to survive the worst the market can throw at them.
This realism goes down to the financials. Businesses need to be showing that they have done everything they can to lengthen their business runway — that is, the time it takes to run out of money, assuming income and expenses stay constant.
Investors want to know that their money is going to last at least 18 months, no matter what. Be realistic and honest when you talk to investors — they will mostly likely abide by the rule of “if it seems too good to be true…”
Focus on fundamentals
We’re still comfortable investing if a company’s fundamentals are strong. If anything, these fundamentals mean more to us now than before the crisis. The easier it is for us to see the business case for a company, and a clear path to profitability, the more inclined we are to invest. To do that, we look at the team and your product.
This should be a call to action. Forget any side projects, or vanity aspects to your business; now is the time to direct and optimize your remaining resources into developing the unique product or service that will be key to attracting VC money.
A better product or service will almost always improve your commercial viability, so investing your time in product development while you won’t have much return on investing in sales and marketing functions is a smart move. If a company approaches us for investment, we like to see that they’re focusing on building the best possible product.
Invest in your team
We want to invest in a team that’s truly passionate about what it does, with the talent and experience to build an idea into an industry-leading business. We judge a lot of this on the intangibles, such as founder chemistry and motivation, but we also look for key indicators that the team works as a well-oiled machine.
Investing in the parts of your team that are going to be the key drivers of your business, motivate them and take away any barriers to excellence.
This may mean giving key team members more control over the various aspects of your business and product, investing in new tools for them, or even giving out equity stakes.
These are all natural parts of growing a business beyond the initial startup and seed phase and should be embraced when necessary. Whatever you can do to cultivate your greatest asset — your people — should be done.
(re)Learn the art of the pitch
While remote deal making is not necessarily a big deal, it does present its own set of unique challenges, such as the need to be extremely precise in your pitch. By now, we all are aware of how tiring endless Zoom calls can be, so coming to the point quickly and not wasting the investor’s time is highly appreciated.
The more founders can refocus their skills and learn the art of the video pitch, the better they will be able to build conviction.
Judging by our own experience over the last couple of months, dealmaking is still very much alive. It may be true that not all VCs are as active as they claim, but the environment isn’t as bad as some suggest.
Founders that focus on the core of their business, product and people, and that plan realistically and responsibly for future growth will still find that there is capital out there. We, and many of our colleagues at other VC firms, are still welcoming pitches from ambitious European founders.