1. Insights of the week
US investors pursue more European deals
US investors had a profound impact on the European VC scene in 2021. This looks set to continue in 2022. Out of the €100B in deal value recorded in 2021, US investors participated in deals totalling €70.7B, up 194% over the prior year, according to Pitchbook. The impact on deal sizes has been dramatic. The median European round size with US participation nearly doubled in 2021 to €38 million, compared with €19.4 million the year before. Deals with no US investors are a fraction of the size, at a median of €6.3 million in 2021. As a result, founders are increasingly keen to incorporate US investors in their target lists for new funding campaigns. This is especially evident for capital-intensive projects in DeepTech where the smaller average fund sizes of European investors are seen as a limiting factor.
But isn't this surge in US money only relevant to later stage companies, as in the past? The simple answer now is 'No'. A key insight is that whilst late-stage deals (Series C onwards) accounted for the majority of this growth by value in 2021, the number of early-stage rounds surpassed late-stage rounds for the first time. US investors are increasingly keen to make their initial move much earlier in the startup cycle. With greater anxiety over the resilience of late-stage valuations as public markets have dropped, VCs are looking more closely at earlier-stage opportunities to find greater value growth potential for the future.
US investor appetite for European investment continues unabated in 2022, even in this less certain investment climate. Through January and February, US investors have already participated in €12.1B worth of European deals. 118 of these were at late-stage (C onwards), 109 at early-stage (A, B), and a remarkable 75 at Seed. Even the gorilla that is Tiger Global, well known for its mega-deal investments across all continents, has quietly been picking up some hot early-stage startups. The New York firm invested in 116 early-stage deals globally in 2021 (compared to 238 at late-stage), up 8x over 2020. 21 of these deals were in Europe. Now, only 2 months into 2022, the European tally already stands at 5, plus 2 deals at Seed stage. And this week we read that Partners at the firm have committed $1 billion of their own cash to invest (as an LP) in other Seed funds. The early-stage landscape in Europe seems set for further change.
Warm intros from current investors
Our latest blog article, The Guided Fundraise for Startups, has prompted some further great insights from founders. First, on the subject of warm intros: Founders rightly expect that existing investors will go the extra mile to support them when they next need to raise capital. This is not surprising, as investors often say that a key part of their 'value-add' is helping in the funding process. Big claims are often made when investors enter the cap table. For example, how they have a great network that can be brought to bear in the future. But when the time comes, these early promises too often seem to have faded away. Founders find themselves having to kick and cajole current investors to get out their little black books and make those calls. As a founder, you very quickly find out who your real friends are.
One founder we worked with recently used a great ploy to garner support. Having created the investor short list, we then researched which of these new investors had previously co-invested with the current investors. Surely, if they had worked together on a prior deal, a relationship was there to be leveraged? We drew up a simple table and the founder created a slide that was used at the next board meeting. Existing investor directors were essentially presented with a list of 'intro requests'. This list was then regularly updated noting the successful intros made and included in subsequent board presentations. The list was then extended to other investors not on the board, but who also had some great contacts. This created a sense of gentle competition amongst current investors who all wanted to be seen to be helping the most!
On a similar theme, the same founder asked us if we could dig a little deeper on current investors to see which other company boards they were on. The idea was to see who else was in the close network of each investor - not just partners at other VCs, but other portfolio execs that could be useful in extending the founder's own network. This information was used in a more softly-softly manner during investor 1/1s to request other valuable intro's for the business. Some investors are highly proactive in this area and don't need any prompting. But for those that aren't so good at stepping forward, a gentle nudge can go a long way. Once investors know you've done your homework, there's nowhere to hide!
Tell VCs why they shouldn't invest
In preparing for investor engagement, founders will carefully assemble all the reasons why someone should invest. In fact the essence of the investor pitch is just that - a structured rationale for investment. But experienced founders know this is not enough. They also brainstorm the reasons why investors shouldn't invest. No business is perfect and there are always risks and uncertainties. Capturing these is an important step in preparing for investor Q&A. Developing and rehearsing answers is just the smart thing to do. We want to be prepared, on the front foot, and not taken by surprise when the questions start flying. That could happen in the pitch or in early due diligence.
Some founders go further. They convert this Q&A prep into an appendix to the investor deck for the live pitch. When a VC Partner asks one of those awkward questions, they refer to that slide in the appendix. Documenting and sharing the Q&A like this sends a strong message; we know where our weak spots are and we are across them. This demonstrates confidence and openness. It also engenders trust, an essential element in the relationship-building process. But there are two other powerful reasons for doing this: First, having the executive team brainstorm these points in advance puts the whole team on the same page prior to external scrutiny. Everyone will be singing from the same hymn sheet. Second, you are going to increase your chances of funding success by enabling the Partner to better sell your proposition internally.
Once a Partner takes an interest in your startup they will need to bring additional resources into the picture as the due diligence process starts. These resources will increase as they head towards making an offer. But the other Partners in the firm will also need to be convinced that this is all worthwhile - they will be competing for the same resources. Part of their job is to challenge the Partner sponsoring the potential investment (your champion) and ask lots of difficult questions. You won't be there to answer, so by arming your champion with a set of Q&A slides, you will be more assured that solid answers will be provided. This makes your sponsor's job a lot easier and will reduce their fear of looking stupid (FOLS), one of the 2 great investor anxieties.
2. Other pieces really worth reading this week:
How To Overcome The Chicken-And-Egg Dilemma Of A Marketplace Startup
Raad Ahmed is Founder and CEO at Lawtrades. This is his story about how a shift to aggressively narrow the customer focus saved his business."Before our pivot, we saw that one customer was using the platform on an almost daily basis. At first, we couldn’t understand why. After doing some digging, we learned that he was General Counsel (GC) — meaning he ran all the legal operations within his company. A lightbulb flashed on..."
Are The Good Times Over? Startup Valuations Dip As Inflation, Geopolitical Issues And Pandemic Concerns Swirl
A great roundup of current market sentiment from Chris Metinko in Crunchbase News this week. "However, some are surprised at the pace at which the public market tumult seems to have crept into the private markets. While January remained strong for fundraising, the last few days of February seemed to show decreasing deal flow and size, according to Crunchbase data."
'Caution and Innovation' at Lux Capital
Josh Wolfe is the Co-Founder and Managing Partner of Lux Capital, a $4 billion venture capital firm that invests in solutions to the most vexing puzzles of our time. Aimed at DeepTech folks, this excellent podcast provides an up to date perspective on the venture landscape and how it impacts Lux’s investment process.
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