This week on the startup to scaleup journey:
1. Insights of the week
European Venture funding in Q3 - mega deals abound
Crunchbase has just released European investment figures for the third quarter. Venture funding was down 17 percent for the first three quarters of 2020 compared with the peak funding year of 2019. Funding totalled $10 billion in Q3 2020, up 21 percent quarter over quarter but down 12 percent year over year. But, as ever, the real insights lie beneath the headlines. We discover an important new trend, the rise in $100M+ rounds that are also happening much earlier in the life cycle - namely Series A and B - rather than just at Late stage (Series C, D and beyond). As a result, the 20 funding rounds over $100 million represented 45 percent of total venture capital in Q3, higher than the second quarter at 27 percent and Q3 2019 at 39 percent.
Seed-stage funding was down both quarter over quarter and year over year at $0.7 billion. Early-stage venture was $4.1 billion in Q3, up 33 percent quarter over quarter and 1 percent year over year. Some of this increase is due to large fundings above $100 million at the Series A and B stages as mentioned above. Late stage, which includes Series C and later rounds, came in at $5.2 billion, up quarter over quarter by 19 percent, but down year over year by the same percentage.
The two leading ecosystems in Europe, namely the U.K. and Germany, secured less funding in 2020 compared with 2019. Despite Brexit and the accompanying loss of European funds, the report says the U.K. will continue to be the leading market in Europe due to the cluster of leading venture firms, ties to the U.S. venture markets, English as a global language, and London, a cosmopolitan city. Since the 2016 Brexit vote, the U.K. has fluctuated between 34 percent and 41 percent of European venture capital on an annual basis. In contrast, Germany, the second-biggest funding market in Europe, garners 12 percent to 17 percent of European funding capital.
Investors will evaluate YOU before they evaluate your pitch
One of the most important pieces of pitching advice is to start strong, but some confuse this with starting fast - trying to get to the meat of the story without delay. Time is money and you only have a 50 minute Zoom slot, so you rush. But this is a mistake. Starting strong requires grabbing the audience's attention first, without drama. Recent insights suggest you should allow more time for your concept to sink in while they’re subconsciously evaluating you.
In The golden rules of the investor pitch meeting, we provide a great way of setting the tempo: As you transition from introductions, don't rush into the pitch. Hold the visuals for a few moments. First, make clear your company purpose by verbally describing your mission in a short introduction incorporating a single declarative sentence that defines your business – the opening gambit. If you can use this moment to reveal a special insight or a great anecdote to illuminate the concept, you are allowing time for first impressions to be formed. Look for the emotional connection first and don't get into the weeds too quickly.
Beta Klein at VC firm Creandum adds, "When questioned - dare to be honest. Do you regret a decision and get a chill when asked about exactly that? Instead of trying to come up with something, be honest and admit that in hindsight it was a mistake. Authenticity and honesty is appreciated by good investors." VC Mark Suster goes further; "The first 'Blink' evaluation they’ll make is about YOU and only when they’ve subconsciously decided whether they find your smart, likable, credible, a good leader, inspirational, competitive and all of the other subconscious attributes they’ll look for do they begin to truly think about whether your business idea has legs.
Why aren't investors calling you?
In our August piece on Invisible Founders we talked about how founders must raise their public profiles; "..other than a minimalist LinkedIn bio, some founders are a big unknown. Investors don't like unknowns." The same is true of your company. If your initial approach is the first time an investor has heard your company name, you'll be batting on a tough wicket. Imagine what it would be like if you could go a step further and have interested investors calling you instead. You don't have to be a high-profile serial entrepreneur for this to happen.
A founder we worked closely with through multiple rounds of funding did just this. A well orchestrated public awareness campaign served multiple purposes: Customer lead generation, partner lead generation and investor lead generation. This founder's primary focus was to stand out on social media through a strong content marketing campaign.Many modern journalists, media publications and investors look to social media as a source of material and inspiration, so if you can stand out there you’ll have a far higher likelihood of building your network. (For some great tips on this kind of media exposure read this.)
Figuring out what the target investor audience was reading and which feeds they were monitoring was the first step. In this case it was a combination of Twitter and LInkedIn plus certain industry panel events. After some judicious placement that focused primarily on customer engagement stories, investor scouts were soon picking up the signals and the incoming emails and calls started. "Hi, I'm Joe from XYZ VC. When might you be looking for funding? We'd love to introduce our firm." No longer the awkward cold calls to investors - they were the ones making the first moves.
How to craft the cold approach email
Several responses to last week's item 'Don't send your fundraising deck as a link', all around what you should put in your covering email. Whilst content should always be tailored and appear highly relevant to the reader (do your research first) there are some basic guidelines that seem to work well, especially in cold approaches. As these will inevitably represent a good deal of your outreach, you ideally want to find a basic structure that you can repeat.
First, keep it short - around 200 words maximum. That's roughly equivalent to this 3-paragraph item. Start with who you are and why you're emailing. Concisely outline the problem you are solving and the solution you are creating. Then provide evidence of progress, customer traction, and some key metrics. Explain the stage you are at and what your needs are to move to the next stage. Finally, ask for the meeting.
Above all, you must personalise the content. If for one second it appears like a mail shot it will get binned. Linking your interests to theirs in some way is an effective way of creating relevance, but you need to really do your homework first. For some further insights into this topic and some great examples of cold emails that investors have reacted positively to, take a look at Jason Lemkin's blog.
2. Other pieces that are really worth reading/listening to this week:
Family Offices Can Propel The EU Venture Capital Ecosystem
A great primer on Family Offices in Forbes by Kjartan Rist, founder of VC firm Concentric Partners. For those not familiar with this class of investor this article provides an excellent overview. As two-thirds of newer family offices (created post-2015) now make direct investments in private companies, compared with only just over 50% of those founded between 2006 and 2010, and with 61% of direct investments made in technology companies, this is an increasingly important source of capital to consider.
Future Fund publishes latest diversity data & will close end November
New Future Fund data just published provides a detailed picture of the 745 companies that have been approved for £770.8m worth of Convertible Loan Agreements since the scheme was launched on 20th May. There have been 1,243 applications in total so far. The Future Fund will now close for new applications on Monday 30th November 2020.
Tech’s Influence Over Markets Eclipses Dot-Com Bubble Peak
As reported in the WSJ, Technology companies are set to end the year with their greatest share of the stock market ever, accounting for nearly 40% of the S&P 500. Apple alone accounts for more than 7% of the index.
FinTech is Europe’s largest investment category.
It's official. Fintech businesses received more than €30B of venture capital investment since 2014, according to the latest report from Dealroom. Investment in the first half of 2020 was below 2019 levels, but still higher than 2018 in almost all the hubs. London dominates investments into European FinTechs, claiming 57% of capital invested in the first half of 2020.
The deal Jeff Bezos got on Basecamp
When you're weary of chasing venture finance and wonder if there is another route to building a business, read this remarkable story of how David Heinemeier Hansson did a deal with Jeff Bezos. As DHH says: "I think it’s a shame that arrangements like this aren’t more common. I think many companies would be better off if the founders got to hedge their bet just enough to dare go the distance without the anchor of traditional venture capital."