Early-stage funding in Europe is booming – now at 4x relative to 2012 – with more investors committing capital than ever before. But, according to a DealRoom report, only 19% of European startups go on to successfully raise Series A funding in the 36 months following their seed round. That’s just one in five. Why so few? What factors make or break a startup?
While there is no universal manual for constructing and funding a fast-growing scalable business, I believe it’s a useful exercise to dig deeper into the elements that have – and have not – worked in the past, with the hope to extract practical insights and potentially actionable advice for seed-stage entrepreneurs.
As well as drawing on my personal experience of helping young companies scale, I’ve had the pleasure of tapping into the expertise of some of the most influential names in the industry.
The important role played by pre-Series A investors
To start off on the right foot, startups should partner with the right investors for them from the beginning (provided they need external investment early on). These investors can prove instrumental in the run-up to Series A since they can facilitate access to knowledge, either directly or through their network.
“Sometimes this information can be delivered via individual investors passing on their experiences at the board level or other strategic touch points,” says Tom Wilson, Partner at Seedcamp, a pan-European fund with 300+ startups in their portfolio (including 3 European unicorns – TransferWise, Revolut, and UiPath) that have raised over $2 billion in follow-on funding from leading global investors. “Alternatively – and this is something we've tried to create a framework for at Seedcamp – founders can help each other peer to peer. Founding a company can be a very lonely existence at the earliest stages of its growth, and therefore being able to tap into a network of advice and mentorship can be hugely impactful.”
Being associated with investors who have a great reputation and track record also adds credibility and has multiple positive spillover effects (e.g. ease of hiring, increased brand awareness). Pietro Invernizzi leads AAA, the new Series A Programme at The Family, which helps ambitious founders from all over Europe prepare for and raise their Series A round. To date, The Family has supported more than 250 European startups, assisting them in raising more than $500 million.
“At pre-Series-A, your brand is a result of your credibility. And because a couple of t-shirt-wearing folks working from a rundown flat in east London don’t normally have a great deal of credibility, all they can do is borrow it,” explains Invernizzi. “What better way to borrow credibility than raising from exceptional Seed or pre-Seed funds who (a) will (passively) act as a stamp of approval on your ‘cv’, and (b) have the network needed to put you in front of the most amazing people to join your journey? This is why – even later on – some companies are willing to let top-tier funds invest at a discount compared to other deals on the table: their brand makes it easier to attract top talent.”
Finally, as many value-add services provided by investors are already being commoditized, there is no substitute for communicating a strong belief in the business early on and giving founders an ambition boost.
“Great early-stage investors not only believe in a founder and their vision, but amplify it,” shares Matt Clifford, Co-founder & Chief Executive at Entrepreneur First (EF), a global talent investor that has created 230+ companies worth a combined $1.5 billion. “If I think about what I’d hope our founders would say about me, it’s something along the lines of ‘Matt not only believed in me, he realised my idea could be bigger than even I did. And he gave me the permission and confidence to 10x it’. So many people have investors that look to make their ideas smaller and more achievable, when what they need is the support to be great and huge.”
No secret sauce, but some key ingredients
There is no shortcut for hard work. Beyond vision, scaling a company demands a combination of ambition, focus and execution. Not to mention luck.
For venture investors, the focus on the quality of the team remains prevalent throughout all stages of a startup’s life. It’s just the evaluation criteria that change slightly.
“[At Series A,] investors will be looking for evidence that the leadership team is equipped to take the company to the next level of growth,” says Wilson. “This doesn't necessarily mean that the individuals in such a leadership team need to be in the trenches across all areas of building the product. But you do need to be confident that these people can grow into the leaders of the company and, as importantly, have a high degree of success in attracting and hiring world-class talent into all key areas of the organisation.”
Having a stellar team is not enough. If seed rounds can sometimes be raised on the back of a plan of what will be done, for a successful Series A, there needs to be proof of progress. This is part of the reason why it’s so important for entrepreneurs to understand, early on, what levers drive the growth of their business.
“With a Series A it should be clear that something is working, and it’s the first round where you’ll be raising money to scale. Don’t get me wrong, there will still be plenty to do, but there should be clear evidence of something having clicked,” says Clifford. “With a SaaS startup it might be proof of product/market fit. If you’re a deeptech company, perhaps you have zero customers but the product works.” Not only do entrepreneurs have to show that they are on the right path, there still needs to be a lot of room left for growth. “Many people forget that structurally Series A funds can't make money if you exit for less than hundreds of millions of dollars, ideally billions. They need 20x growth. So you need to be able to convince VCs that you can get to that size.”
When it comes to software startups, certain metrics can indicate product/market fit. “Not having taken the steps to clearly demonstrate product/market fit is a mistake,” warns Sophia Bendz, Partner at Atomico – a $765 million pan-Europan fund focusing on Series A and beyond, with a portfolio of 75+ investments. There are benchmarks of what constitutes acceptable traction levels and historical information on how Series A KPIs looked for the companies that went on to achieve meaningful exits. So it’s important to know what metrics to track and to be able to discuss them in detail with investors. As Invernizzi summarizes, “the better your metrics are, the less you will need storytelling.”
However, these metrics are not to be considered in isolation nor applied as a fits-all formula, points out Evgenia Plotnikova, Principal at Dawn Capital – a $232 million fund investing in Enterprise Software and Fintech across Europe.
“The nirvana of a great Series A goes well beyond metrics to something more fundamental. The true focus of a great Series A investment should be product and execution. The best products are not just about technology. Having identified a real pain point, great products define and own categories, attract partners and become the centerpiece of a value chain. The best teams then build an execution machine around that product,” details Plotnikova. “The go-to-market strategy cannot be an afterthought. Lead generation, pipeline and funnel management, customer success and geographic expansion are a hard science that need a lot of work to get right. The largest exits in our portfolio, companies like Mimecast and iZettle, have done just that: with a relentless focus on product and execution, they are multi-billion-dollar winners.”
Optimizing the Series A fundraising strategy
Raising a Series A is an outcome that can’t be optimized in the absence of a solid core proposition. That being said, a good way to begin is for startups to think of the investor profiles that would constitute the best fit for their business.
“Entrepreneurs can get the most out of the relationship with a Series A investor by having a good understanding of what they want from an investor going into the relationship,” highlights Bendz. “Capital is just a commodity, so it is important for the founder to think about what type of partner can be most helpful for them.”
Then, to smooth the process, startups can look to leverage the network of existing investors and fellow portfolio companies. Wilson shares the following insight from his portfolio.
“The best companies do an excellent job of leveraging networks to get in front of the right investors, at the right time, and put their best foot forward as part of their fundraising. Additionally, we see a strong correlation between those companies that keep their investors updated regularly with those that raise strong follow-on rounds. Your existing investors (particularly institutional seed VCs) are constantly meeting with potential Series A candidates. Providing them with regular updates allows such investors to best represent the company to potential new investors and really sell them on the founder's behalf.”
As for approaching and planning investor conversation, Invernizzi shares his experience.
“Two of the most impressive Series A deals I’ve seen were those of Payfit (part of The Family’s portfolio) and Alan. In both cases, the founders showed an incredible capability to focus, focus, focus until their product/market fit was proven. In the meantime, they built personal relationships with just a few highly selected investors, whilst saying no to anyone else who reached out. Once they felt ready, they had warmed up the selected investors enough to get them to commit, and this gave them the confidence to create a lot of competition around their deal with other ‘external’ investors. Payfit raised £4.5 million from Otium, Xavier Niel, Oleg Tscheltzoff and other high-profile investors, whereas Alan raised £19.8 million from Index, Partech, Xavier Niel and others.”
Another strategy mentioned by Invernizzi is Jason Lemkin’s “1-and-30 Rule”.
“It consists of being in fundraising mode 52 weeks a year, but with a twist – limiting the time spent on speaking to investors as follows: 1 hour per week meeting new investors and 30 minutes per week updating existing ones. So, ‘Should I meet with [VC] that reached out?’ ‘Yes – if it’s your best use of that allocated, mandatory hour this week.’ By working this way, you’ll have a full pipeline of new investors and, importantly, you’ll have created champions in your existing investor base.”
Having a unique narrative to share is powerful, both when communicating the journey so far and the ambition for the future. “I’ve seen a large number of fantastic Series A deals where the metrics were not exceptional. These were cases where the founders were so unique in the way they explained their value proposition, portrayed their vision and [clarified] their unit economics that every investor saw their round as a no-brainer. Storytelling is always a way to multiply the effect of your metrics.”
Bendz agrees. “I think entrepreneurs need to prepare how to take investors along on a journey by honing their story before they go out to raise. That means being clear on the long-term vision of the company and the key problem they are solving.”
Learn from other startups’ mistakes:
- Not having a clear plan
Know what you will spend the money on. Know what your outcomes should be at B and have a credible plan to get to those outcomes. (Clifford)
- Leaving it too late
Two months’ runway is not enough. The CEO should start having appropriate conversations when they have 6 months. It doesn’t need a final deck, story, or even amounts. But if you’re not kicking off the process by then, you're going to struggle. And yes, sometimes it happens quicker, but the big mistake is assuming it will be quick. Fundraising is a time-consuming process and often takes longer than founders think. (Clifford)
Building relationships early, even when not fundraising, helps as it enables founders to build a focused pipeline of potentially interested VCs for when the timing is right to kick off. (Wilson)
- Not being in control of conversations with investors
Founders should understand that they need to be the ones leading the discussion, not the investors. That means it should be you, as a founder, driving investor updates and deciding when to formally start your fundraising process, rather than getting caught up in something you cannot control.
So, if you want to talk about your metrics in detail with investors that reach out to you (and make yourself accountable to improving them quickly since those investors are now in the know), then do it. But don't feel pressured into sharing everything (e.g., size of your pipeline, sales efficiency, different types of contribution margins, etc.) with every investor that reaches out to you before you go into fundraising mode. (Invernizzi)
- Omitting to pre-select investors
Not doing research on the funds they speak to in order to understand if they are the right fund for the stage they are at. (Bendz)
- Over-optimization
The CEO wanting to hit x valuation can result in compromising her/his decision making. (Invernzzi)
- Raising too much too early and increasing cash burn too fast.
It is becoming normal to raise £2 million before knowing how to survive with few financial means, how to get creative about getting customers with no marketing and how to run the company with a lean cost structure. At The Family, we’d rather see companies taking longer until they are ready but without incurring excessive spending that will cause their company to go bankrupt. (Invernizzi)
- Hiring too fast and hiring seniors
Growing your number of employees (or interns) will always give you a feeling of achievement. However, at pre-Series-A, every extra person should be hired only if strictly necessary, and the right time should be spent on training them and making them feel as much ownership as founders do. This is the best way to show Series A investors that not only the founders but everyone in the team is ready for the next step. Hiring someone too senior to cover for something you are not capable of doing at seed stage may also be an unnecessary cost for this stage. Instead, why not find hungry juniors with extremely steep learning curves? (Invernizzi)
- Rushing expansion
Expanding to more markets too early, instead of focusing on getting great customer stickiness with the product. (Invernizzi)
- Focussing on top-line growth only
For example, using coupons or extreme paid marketing with the sole goal of increasing revenues rather than focussing on unit economics, profitability and sustainability. (Invernizzi)
