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:

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

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

    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.

    Investor material for early-stage startups

    Yesterday (May 10 2017) I held a workshop at the PODIM conference in Maribor, Slovenia. Topic of the workshop was which type of investor material do you need to attract investors for a early-stage startup.

    My main points regarding investor material are:

    • Investing in early stage startups is all about personal trust. Your startup don’t have that many data to show, so investors are mainly betting on the team/you. This means that the most important thing to convey in the investor material is that your team is world-class!
    • The three most important things when reaching out to potential investors: 1. Get introduced by mutual contacts, 2. Do your research and contact the relevant investors and 3. Be specific when contacting them (don’t just ask for coffee).
    • Regarding the need for introductions: All well-connected early-stage investors are getting a lot of requests per year – up to +1000 a year, but invest maybe in less than 10. This honestly mean that it’s really hard to get their attending if you are just cold emailing them. To stand out you need to get introduced via mutual contacts. This increased the chance that the investors are taking you seriously a lot!
    • Who are the investors relevant for YOUR startup: 1. Investors that invest in the same risk/reward matrix your startup is current in, 2. Investors that are interested in your industry (and understands it) and 3. Investors that invest in startups that are in the stage your company is currently in.
    • Do you really need a business plan ? I (and many other seasoned investors) don’t like business plans, because they are too long and often outdated. But this is really culture-dependent: Investors in some countries/regions still prefer along business plan. Check out what’s the status in your country before wasting too much time writing one.
    • What you for sure need in your dialogue with potential investors are: 1. An intro email (as explained above), 2. An executive summary (the 1-2 page “teaser” describing your startup very briefly) 3. The pitch deck (the typically 15-slide PowerPoint presentation that replaces the long business plan) and 4. The budget.
    • And please, don’t ask the potential investor to sign a Non Disclosure Agreement (NDA) before even meeting them. You first need to get them interested in your case (by disclosing non-confidential information), and most professional investors (business angels and VCs) will not even sign NDAs later in the process.
    • Ps. do you really need money from investors to grow your startup? And if you do, do you need them now or can it wait until you have more traction? The first money you take from investors are very expensive (due to a low valuation of your company)!

    Feel free to download the presentation here.

    Best regards,

    Nicolaj Højer Nielsen

     

     

     

    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.