Figuring out how and when to finance your startup is a complex decision. Startups wanting to self-fund can struggle to find the right recipe to generate revenue, and bringing in external funds is not a guarantee for success. With the current geopolitical climate in Europe, rising costs, and funding for European startups down in comparison to last year’s numbers, the question of whether to fundraise and how to prepare remains.
To shed some light on the situation, we spoke to Szymon Kwiatkowski, Investment Manager at EIT InnoEnergy, Pieter Poppelsdorf, Head of Investor Relations Benelux for EAS, and Georgios Diamantopoulos, Founder of Zero to MVP. They gave us their tips on how startups can weather the winter ahead, and insight into what to expect in the first quarters of 2023.
What’s going on with the fundraising climate, really?
Szymon and Pieter both have an optimistic outlook on the fundraising possibilities for startups this winter, especially as we get closer to the first quarter of 2023. Funds have recently raised high levels of cash themselves–a positive sign. Szymon notes EIT InnoEnergy has already invested in 10 startups this year and is looking to close more deals before the year finishes. So, should a startup fundraise or not?
The money is there, but take it from Szymon and Pieter: this is an investor’s market. Startup valuations are on a downward trend, and the decline looks like it will continue until at least the end of 2022. Plus, the rising costs and inflation (and those lower valuations) mean funds will be holding on to a certain percentage of their assets so they can support their portfolio. In fact, funds will be extending runway for their portfolio so their startups don’t need to fundraise with a decreased valuation. So the short answer is, no, it’s not a good time to fundraise–the circumstances are not favorable to startups right now.
I know it is not the right time to fundraise, but I have to.
It’s not the end of the world! Especially if you are an early stage startup, because the drop in valuation has not affected them as it has startups with a history of valuations. If you are a late stage startup, do your best to make sure your financial metrics reflect your potential to grow. Investors are all about minimizing risk, so make sure to present all the evidence you can of your startup’s potential. Pieter encourages startups to always include important financial numbers in your deck, including current revenue and historical and future growth. Long term numbers aren’t realistic, but they help give an idea of exit and potential returns. And don’t forget that when closing a deal with investors, they are not just looking at finances–especially when it comes to early stage startups.
The founders’ capacity for self-awareness and to accept coaching is key. Nowadays, funds build support systems into their offering, so they want to bring on founders who can identify personal strengths and weaknesses and accept feedback and advice from experts. As an entrepreneur, your passion for your product is one of your strongest assets as well. Don’t be afraid to show how committed you are to your product, as it signals to funds you will remain committed and motivated during the inevitable lows of your business.
Finally, when you do approach VCs, don’t forget it’s a negotiation! Do your best to get more than one offer on the table. Szymon says having multiple offers is key for shifting the power balance and getting more favorable terms for your startup.
"If you start your relationship with a VC by giving, not by asking, you automatically set yourself apart from the crowd." - Pieter Poppelsdorf
I don’t need to fundraise right now, but I will soon.
Identifying your upcoming need for funds in advance gives you a great advantage: You have time to prepare. Months out from when you approach funds, you should be ensuring your pricing is on point and your numbers show potential for growth. And don’t forget relationship-building–it’s arguably the most important thing you could do to prepare. Pieter has a word of caution for founders: Don’t approach VCs with a request! VCs are constantly solicited. If you start the relationship off by giving, not by asking, you automatically set yourself apart from the crowd.
Establishing a human connection with investors by providing them with useful information or taking them out for a meal periodically allows you to get to know them on a human level. This sort of relationship is invaluable and can serve you well for years. However, creating such a relationship is no small task. Attending events is one of the best ways to make a first connection, but approach relationship-building as a long-term goal that requires persistence and patience. Preparation is key here. If you have identified a VC with whom you would like to connect, research their background and specialization. Make sure you know their fund’s values and recent notable exits. That level of preparation communicates that you are sincerely interested and have already invested time and energy into the relationship, before ever speaking to the VC face-to-face. And don’t be afraid of a little social maneuvering. If you see on LinkedIn you have a connection in common, see if your common acquaintance will introduce you to the VC. Any personal connection is better than none.
Szymon encourages startups to search out funds who specialize in their sector or industry. Specialized funds have extensive market knowledge and will jump at the chance to build a relationship with a startup working in one of their strategic value trains. And don’t forget to factor in geography. For example, non-European funds may be leery of investing in Eastern Europe due to the geopolitical tensions. Their conclusion? Don’t skip European organizations eager to support their local entrepreneurial ecosystem.
I want to bootstrap my startup.
As Szymon says, there’s no money better than customers’ money. But bootstrapping is difficult, even when inflation and rising costs aren’t complicating factors. Georgios, who has headed up startup Zero to MVP for the last three years, has pivoted more than once in his quest to find a truly scalable business model. He’s on the same page as Szymon when it comes to self-awareness being a key characteristic for entrepreneurs. One of the most important things he does is continuously re-evaluate the company’s direction, team goals, and actions.
"There’s no money better than customers’ money." - Szymon Kwiatkowski
For example, last year Georgios began scaling his team to take on more business and generate more revenue. But hiring more people brought on a whole new set of challenges in terms of management and the startup’s pricing model. Although his team was able to take on more work, in the end, he did not see a significant change to the company’s bottom line. That experience led to an important realization: he and his team needed to work on their company, not in their company. They could achieve this goal by putting systems and workflows in place so that they can eventually be replaced by those systems and employees. Now, Georgios plans to pivot his startup to serve a very distinct target audience with a clearly defined need. With this specialized business model, he can develop a defined set of services that will be generally easier to manage, but especially in those areas which challenged his team previously: training and organizing new employees and billing.
Pricing is another key point to consider. Georgios is currently targeting a monthly revenue that is three times greater than Zero to MVP’s costs. Beyond paying for expenses every month, he sets aside 10% of revenue so he can pay the annual corporate tax bill when it comes at the end of the year. A frugal state of mind is one of the most important aspects a founder must have when bootstrapping a startup. Not only does it help you maintain and extend your runway, it creates a feeling of urgency and pressure which helps you to stay sharp and question your startup’s status quo.
Financing: There's no simple answer
When it comes to funding your startup, there are few straight answers because the context varies so greatly from one startup to another. However, these three experts pooled their best advice to help startups navigate these murky waters. Let’s sum it all up.
- Anticipate your need for fundraising by monitoring your runway and revenue.
- Build relationships with investors from multiple organizations far in advance of when you launch your fundraising round.
- Hustle for more than one investment offer.
- Search out specialized funds.
- Track metrics that measure growth.
- Cultivate self-awareness and accept help in areas you need it.
- Question your company’s status quo and objectives to build the business you want to build, not just a business that survives.
- Maintain a frugal state of mind.
Szymon Kwiatkowski is an Investment Manager at EIT InnoEnergy with more than 11 years of experience in venture capital. At EIT InnoEnergy, he works to support energy innovation, specializing in early stage startups. Over the past 12 years, EIT InnoEnergy has supported almost 300 companies, and holds equity in 200 companies, including startup SunRoof, which just raised €15 million.
Pieter Poppelsdorf is Head of Investor Relations-Benelux at EAS, where he works to connect investors with Estonian startups. In 2021, EAS brought €194 million in direct foreign investment to Estonia.
Georgios Diamantopoulos is co-founder at Zero to MVP, where early-stage startups or solo founders go to build their product or service. With over 15 years of experience working with startups, Georgios and his team empower other entrepreneurs with systems that can pivot and scale.