funding – Startup Funding Book

Introduction to startup funding (webinar)

Webinar: Introduction to startup funding by Nicolaj H Nielsen (author of The Startup Funding Book)

Join me for this 1-hour webinar, where I will go through the fundamentals on how to get your startup funded. The webinar will cover:

Overview – investors in the different phases of a startup
Walk-through of the different investors (FFF, Angels, VC, public funds, crowdfunding, banks)
How to contact investors and investor material needed
Case: business angel funding for Recon Instruments
Q&A

Fill in the form below to receive the link to the recording of the webinar.

How to convince a business angel to invest in my startup?

Download the Business Angels chapter

Many founders are for good reasons going to business angels for startup funding. Most have however very limited knowledge about business angels and how to convince angels to invest in their startup.

That’s why I in the Startup Funding book dedicated a 17-page chapter to business angel funding.

I have decided to give away the chapter for free (PDF). You can download the business angel chapter via this link: Business Angels – Startup Funding Book

The key take-away points from the business angel chapter:

Most business angels are driven by more than money. If the only reward you offer is financial, you’ll lose a lot of potential business angels. You need to understand what drives an angel and what you have to offer against what they’re looking for. Look at what they’ve invested in the past.
Not even business angels invest in business ideas. You need to show you can do it and you’ve got what it takes to keep on doing it. So before you knock on the door, you need to get going yourself. Get a team and get working on converting your idea into a business.
Personal trust is one of the most important factors determining whether a business angel wants to invest.
Look for angels who know you already, or who know the industry, because they’ll be more comfortable analysing the risk/reward of your startup, even if they don’t know who you are.
Do your homework and your due diligence. Call companies the angel has invested in. Did they get what was promised? Get all your agreements down on paper – including those not about money

Happy reading!

Nicolaj Højer Nielsen

How do you get investors to trust you?

For any investor to invest in a startup, they need to have a lot of trust given the scary statistics on how many startups fail.

You can even divide this trust into two things the investor must believe in: trust in the business opportunity (that the problem you are trying to solve is real, that the market is big enough etc.), and trust in your team (that you have what it takes to deliver on the opportunity).

But there is a big difference between early- and late-stage startups when it comes to how trust is generated.

If you’re a late stage startup, you have a product, users, paying customers and revenue, and a team that have delivered the above. What this means is you have a lot of historic data, that is both quantitative and qualitative, to support your claims. You are able to provide credible answers to tough questions like: What is the cost of getting a customer? How much are they willing to pay? and How big is the market? Real data beats every scenario analysis there is. If you have customers paying, that is proof – and proof generates trust. Of course, they still have to have trust in you and the team, but it’s relatively easy to convince investors about the business because you have real data.

But what about an early-stage startup? You might have a beta version of the product, maybe you have some users, but you probably don’t have paying customers yet. You’ve hopefully convinced a few people to join you, but it’s likely to be an incomplete team. You have very little performance data; it’s all about the future. You’re saying, ‘I think there’s a big market; I think my customer would pay for this cool product if I made it.’

Early-stage startups should of course explain the business and market opportunity, but it’s really 80 per cent about you and 20 per cent about the business.

If it’s all about trust, how do you get early-stage investors to trust you?

There are two different types of investors: those you already know, and the rest. Perhaps you have an acquaintance, or friends and family, who know you and have the means to invest in you. Great, they know you and therefore trust you (and, if they don’t trust you, perhaps you should look in the mirror). Most startups will have to go beyond their personal network and approach investors they don’t know at some point. When they do, they will need to build trust. The key point here is that trust is built over time. You’re unlikely to trust a person you have met for half an hour. This explains why you can’t expect to get the money on the same day
you meet a potential investor – there’s no personal trust. Even if they think you’re cool, feel you have what it takes, and you have a great business, the chance you’ll get money the same day or the day after you meet is tiny.

Entrepreneur turned venture capitalist, Mark Suster, from Both Sides of The Table, said, I don’tinvest in a dot, I invest in a line.

Imagine yourself as a dot on a graph with performance on the y versus time on the x. Even if your performance at a given time is good, investors want to see a line so
they can see you at different points in time. Investors look at entrepreneurs they heard about six months ago who had great plans for the future, and when they meet
six months later they may see they’re still not quite there yet but the line is going in the right direction.

As Lars Andersen, General Partner in SEED Capital, explains: The most common mistake startups make in relation to contacting VCs is that they make contact too late. Seriously, it’s about sticking your neck out there. Your product doesn’t have to be perfect. Build a minimum viable product, use it to learn about your customers, and start contacting VCs. We might say that it’s still too early, but that doesn’t mean never. The now successful wine scanner app, Vivino, had a first productthat was absolute crap, but they gave us something to work from.

This creates a paradox for many startups. You should not count on VC money too early since in reality they invest rather late in the process, but you need to begin building relationships with them early on. They need time to get to know you before they invest their money – just make sure you don’t waste too much time
on coffee with VC partners!

What does this mean to startups? You have to build relationships with potential investors before you need the money – you shouldn’t wait until you have everything in place. Create relationships now.

How to contact investors – do I need to write a business plan?

A common mistake is for entrepreneurs to send their 50-page business plan to multiple investors and then sit back waiting for them to call and invite them to pitch. But before you send out any material, you need to get the trust of a potential investor. They get hundreds, if not thousands, of contact requests a year. Every entrepreneur thinks they have the best idea or they wouldn’t be doing it. But why should a busy, time-strapped investor speak to you? What’s in it for them? In this blog post you will learn how to approach potential investors, and why you shouldn’t send them a business plan.

Rule number 1 – Don’t write a business plan!

Many entrepreneurs believe they should write a long and well-articulated business plan, setting out in detail all their future plans, and that the business plan is key to funding. Wrong. If you send a long business plan to a professional investor I can guarantee they won’t read it – and for three reasons:
1 It’s too long
2 It’s full of irrelevant details
3 It’s out of date

1. Too long

Investors won’t allocate time to read a 50-page business plan, especially not early in the process when they’re mainly looking to weed out unsuitable opportunities. They get so many opportunities that they must be able to evaluate yours in three or four pages. If you send them a long business plan, they might read the first five pages to see if it has an executive summary and they won’t read the rest. Danish venture capitalist Nikolaj Nyholm works as a partner in Sunstone Capital. I once asked him what he does when an unsolicited, long business plan is emailed to him. He said, ‘It will most likely rot to death in my inbox.’

2. Irrelevant details

A business plan is often full of irrelevant information. When you write it, you’re caught up in explaining a lot of details about the future – many of these are of limited interest and value to a potential investor. When you try to estimate your rental costs in three years, or whether in five years you’ll go into other territories like Germany before Spain, you will lose them. They know the plan will change many times before then. What investors are looking for are specific elements of the business model: the problem you’re solving, how you’re solving it, who your customers are, the team, etc. They don’t want to play the needle in the haystack game, trying to locate those five or 10 useful pages among dozens.

3. Outdated

The problem with a lengthy and detailed plan, with graphs of your cost of business and your market penetration guesstimates for year five, is that it’s outdated as soon as you press the print button. Perhaps you assume that your customers will pay €10 and they’ll be in Europe, and then you launch and find out that the customers won’t pay €10 and they come Just ask the founders of some of the most successful startups what their initial business idea was, and you’ll find it was very different from the business they are running now. Investors know that and therefore won’t spend hours reading your lengthy plan.

Should you ever make plan for internal use?

Should you write a business plan just for internal use? Most serial entrepreneurs acknowledge that there’s real value in planning and thinking about the future, in thinking about what they really want to achieve and how they want to solve a problem. Winston Churchill famously said, ‘Plans are of little importance, but planning is essential.’ The value for me and most serial entrepreneurs is not the business plan as a document, but rather the process of making it. You and your co-founder(s) will learn a lot from discussing the really important subjects about the business; the where, what, how, who, why, and when. What you find will have important implications both for your business and for your funding strategy. Planning and strategizing is essential for determining and aligning you and your team to
where you want to go. The question is: what is the best process for you internally to get that alignment? Is that a business plan or is it a different kind of process? My opinion (which is echoed by many investors and serial entrepreneurs) is that you need a more agile process and documentation than the classic business plan approach offers.

What material do I need instead of the business plan

In short you need:

A one-pager – called the executive summary
A presentation – a PPT/PDF presentation with approximately 15 slides describing your business in more detail
A budget – financial calculations supporting the conclusions in the presentation

How to make the one-pager (executive summary) will be the topic of my next blog post

Premature scaling at Addwish

What happens when two inexperienced entrepreneurs get millions in Venture Capital funding? Sometimes it ends up with premature scaling and near-death experience, as in the case of Addwish.

Background: Addwish was initially a wish list solution for consumers and online stores that allowed users to manage the registration and purchase of gifts. The company was started by Brian Petersen and Kasper Refskou Jensen as a side project, which both worked on part-time. The two co-founders had managed to sign up a hundred web shops and had a total of 20,000 users who had tried their service. In early 2013 the company received a €1.5 million seed investment from venture capital fund Sunstone. Now the goal became to do an international rollout – very fast.

Kasper Refskou explains:

For the first year we had a goal of one million consumers on the wish list – a 50-fold increase! This meant a fast ramp-up from two part-time employees to 12 full-time employees during Christmas 2013. We also started to spend heavily on marketing, including some heavy Adwords campaigns for user acquisitions in the US. This led to a sharp increase in burn-rates, which rose to €100,000 a month. The initial strategy was to build a critical mass of consumers (who use the wish lists for free), and then monetize on the web-shops.
We just didn’t manage to reach those figures. For the first year we got 100,000 consumers – a huge growth, but only 10% of projections. So since the revenue stream from the web shops was still not in effect, this slower-than-anticipated growth was critical.

But the worst part was that we didn’t recognize until way too late we were heading in the wrong direction. We had lost our objectivity during the rush for the Christmas season peak. Despite so many clear signals of low traction in the consumer market and being unable to achieve the key performance, we didn’t realize we were dying until we were actually dead! We woke up way too late, when we had only just made the initial entry into selling and revenue generation, resulting in the company being on the brink of bankruptcy by January 2015.

I guess this is what happens when two inexperienced entrepreneurs receive too much unrestricted funding. With too little guidance and supervision, we entered into a-way-too-high burn rate resulting in only one option: go big or go bankrupt.

In perfect hindsight, it’s easy to see what went wrong: we started scaling before we had reached a product-market fit. A wish list did not have a viral loop that was fast enough to meet our goals. When you share something on Facebook it triggers the recipients to share it again straight away. But when you share a wish list, the recipient may like the product, but they don’t need to create their own birthday wish list at that exact moment, which is why the sharing and viral metrics take a lot longer. We were blind to this at that time. If we had noticed it in earlier, we could have changed strategy before it was too late.

Unlike most cases of premature scaling, this one ended well. Before going bankrupt, the venture capital fund sold its shares to a local business angel, Niels Henrik Rasmussen, who injected more capital into the company to keep it afloat. Admirably, the VC initiated and supported these changes in order to help the business survive.
With the new owner also came a new and improved turn-around strategy, now focused on building the B2B segment first. The company was able to become early-stage positive within seven months due to a rapidly growing customer base of 400+ e-commerce businesses.

Kasper Refskou elaborates:

Our turnaround made us focus on what we did really well: approaching the business segment (web shops), and making use of the technology that brings them higher conversion rates and larger basket size. If we were to do it all again, we would do it very much like we do today: “identify – test – adjust”.

Perhaps what you think is a goldmine, might not be. It’s essential to test out every initiative, being truly honest with yourself about the results. It may not be a bad idea, but perhaps the audience is not ready for it, the tech is not there yet or the adoption triggers are not present. But get the right people and make sure they see the vision as you do, and you will eventually find a way. Now that we are mainly focusing on the B2B segment, it’s quite funny to see that our wish list, two years after our big launch and missed KPIs, has gotten more air beneath its wings. This time, without any marketing-related initiatives, we can see that the 100,000 users have more than tripled, and that social sharing is slowly becoming our main acquisition channel for wish list users. Now we have also included the wish list data in our intelligent data analysis for even better personalization in our business offering. In some ways you can say that we have gone full circle – just the other way around.