Raising funds is an essential milestone on most startups’ journey towards exponential growth, and a skill that founders need to master. In just a few years, fundraising has become an important source of funding for a number of structures of general interest in increasingly diverse sectors. This is due in particular to the withdrawal of the State and the reduction of subsidies from local authorities.
With this Q&A with EQT Ventures’ Partner Ted Persson. Passionate about all things product design, UX, storytelling, and brand you can really expect to know more about Fundraising.
1) BUT FIRST WHAT IS FUNDRAISING ?
It's the ability to provide funds to start-up companies (startups) must obtain equity from investors to finance their business.
2) AS YOUR COMPANY SCALES, HOW DO THE QUALITIES THAT INVESTORS LOOK FOR WHEN CONSIDERING AN INITIAL INVESTMENT ?
When raising a pre-seed or seed round, it’s all about team, story and vision. You need to have a kick-ass founding team, a story that convinces investors of your obsession over the problem you’re solving, and a vision of a market that doesn’t exist yet – or an imminent change within one that does.
Since we can’t invest in competing companies, in order to get in at Seed, you need to be such an outlier that we as investors can accept the opportunity cost. For the investor, at the investment level, the risks to be assessed are therefore the following :
• The risk of profitability is that the resale of its shares in the company does not allow it to achieve a level of profitability deemed sufficient. To achieve a significant gain in value, the selling price must be much higher than the purchase price, and therefore, in the meantime, society must have created more value. A company with consistent results, while profitable, would not be a good deal for an investor.
• The risk of illiquidity : the investor has acquired securities of the company; it must be able to sell them over time (at 5 years on average). The risk stems from the fact that the funds managed by investors have a limited lifespan (usually 10 years), and that investors are required to repay their investors with capital gains at the maturity of the fund. They must be able to sell their securities no later than the maturity of the fund, and this in good conditions.
When the company does not present an economic situation attractive enough to find buyers, it is said that the investor is "stuck" to the company, because he cannot sell his securities and therefore cannot make "liquid"
3) LET’S TALK ABOUT THE LOGIC BEHIND VC. WHAT KIND OF GROWTH ARE YOU BETTING ON WHEN CHOOSING TO INVEST ?
Every founder should understand that the VC business model is quite distinct.
First of all, VCs don’t invest their own money – we have Limited Partners (LPs) as our clients. These institutions have endless options as to where to put their capital. Typically, they allocate a small portion of that capital towards VC. In order to tolerate the inherent risk in an asset class that’s founded on the future success of unproven young ventures, they expect a 2–3x return over the fund’s lifecycle.
Let’s say we invest in 45 companies out of a fund. Of those 45, 15 might go bust. Another 15 might return the money invested. The remaining 15 will yield a positive return. However, even within that successful last third, the magnitude of returns will follow something of a power law. As a result, 1–5 standout successes will typically constitute the return of the whole fund.
4) SHOULD FOUNDERS ALWAYS AIM TO RAISE AS MUCH AS THEY CAN AT THE HIGHEST POSSIBLE VALUATION ?
Some people would probably support it. However, there are certainly risks and important considerations.
First, right from the start, you need to optimize your fundraising to attract people who can help you. It may not be the same people who are willing to give you the most money or the highest assessment. But you also need access to operational experience and expertise – not just money – to create a global winner. Many former founders and business builders have made many mistakes in their entrepreneurial journeys and have learned from them, so you don’t have to repeat them !
Secondly, you should think about the dilution of your own stock. For every euro invested, you’re giving away ownership in your company.
In short, I’d advise companies to raise only as much as they need to. To judge that, on the one hand, triangulate based on how much your competitors have raised to give yourself a fair shot. On the other, think about your own plans. For example, how much will it cost to bring on the people you’ll need ?
5) HOW SHOULD A FOUNDER GET IN TOUCH WITH POTENTIAL INVESTORS ? IS A WARM INTRODUCTION NECESSARY, OR CAN ONE JUST REACH OUT ON LINKEDIN ?
You can definitely get in touch on LinkedIn. However, if you do that, be extremely snappy in communicating why the investor should be interested. There’s a lot of noise. In an intense week, an investor can easily receive 30–50 outreach emails. As much as we try, it’s impossible to spend sufficient time on each. If you’re able to receive a warm intro, that can certainly increase your chances of getting through.
6) IT’S OFTEN SAID THAT VCS ARE DRIVEN BY HYPE AND MOVE IN HORDES. HOW SHOULD FOUNDERS LOOK TO CREATE THAT HYPE AND FEAR OF MISSING OUT ?
It's a bit like selling your apartment. You want to have multiple people joining your open house. In the fundraising context, this translates to having a structured process wherein multiple VCs look at the case at once.
At the same time, it’s a bit of an art form, and both sides know that it’s something of a game. The best founders are very skilled at creating a feeling of just a little extra competition on top of what’s actually there. In that sense, it’s similar to sales. And, even if us VCs can see through it, we’ll usually take it as a showcase of how good the founder is at storytelling and creating a buzz. That might just convert into an ability to create a movement around their product.
7) WHAT A PITCH MEETING LOOKS LIKE ?
Before you get the chance to pitch, you’ll have a meeting with your initial point of contact. If that goes well, the person will create excitement within the VC and recruit more people onto the deal team. Once there are enough excited people, you’ll be invited to pitch at a partner meeting.
At EQT Ventures, those meetings are 75 minutes in length. Essentially, our whole team is invited, meaning 20–25 peoples. You typically use half the time to present yourself and the company, and the other half for a Q&A.
8) WHAT DO THE MOST MEMORABLE PITCHES LOOK LIKE ?
Firstly, a lot of investors hate slides. Personally, I’ve got nothing against slides – I think they can be a great way of communicating the initial vision.
Secondly, we meet a huge number of people and innovation comes to us in waves. I’m the most impressed when something truly stands out – when I feel like ‘wow, I’ve never seen three people building something this ambitious’. A lot of technical founders come to VCs thinking that they have to talk like a banker or consultant. They try to speak in graphs instead of talking about the product. Avoid that. Just be who you are.
9) WHEN AFFORDED CHOICE, HOW SHOULD FOUNDERS GO ABOUT PICKING THE BEST INVESTORS ?
This is important, but also quite straightforward. Talk to the people within the VC, make up your judgment, and then reference check with their existing portfolio companies. How they work with and support their current portfolio companies will give you a good indication of the type of support you’re likely to get too.
So as we could see the fundraising is not exact science but a skill that founders need to master in addition to knowing how to give the perfect pitch by differentiating your product from others in order to convince investors to put their money especially in your company with the aim of growing it and being the leader of your market.