If you are planning to raise money in the US for your enterprise tech startup in the current environment, here’s a recap of our ‘Fundraising for Founders ’ session hosted by Andy McLoughlin OBE, Partner at Uncork Capital, in a conversation with Ilya Levtov, Co-founder and CEO of Craft.co, James Green, Principal at CRV, and Maria Rioumine, CEO and Co-Founder of Agora. The discussion took place on April 1st, on Zoom.
The state of Seed vs Series A in 2021
- “Seed is the tryout, Series A and B is when the game really starts.”
- Seed funds usually focus on the team and on the idea; Series A focuses on proof-points based on traction, and Series B on growth metrics (net retention, growth of customer base, etc.);
- What separates Seed from Series A these days can be a very short period of months. Investors will be interested in looking at the company’s performance: “What has the company done with its seed money? What have they accomplished so far? Are their customers satisfied and talking about them?”
Key takeaway: Seed stage is about having a good team, a bold idea, and helpful investors. Series A and B are about exhibiting your business development with great metrics.
Building a network in Silicon Valley while in the UK
- Don’t be afraid/shy to ask for introductions. It’s common for British founders to be hesitant in asking for help, but it’s crucial to do so in order to develop relationships;
- Sometimes it only takes one contact to catalyze the momentum your startup needs to fundraise;
- Take advantage of VCs in the early stage of their career, because they are eager to get into good deals and will be willing to write introductions;
- Get in front of as many people as possible and stay active every single day;
- Serendipity also plays a big role in this process;
- GBx (and similar) events create massive opportunities to develop a personal connection with angels and investors (E.g.: It was only after meeting Ilya in person at a GBx event that Andy decided to invest in Craft.co);
Key takeaway: Be outspoken about your goals, ask for introductions, get exposure and engage with people everyday, via Zoom, email, text, etc.
- During Seed rounds, companies should focus on getting the help of industry experts and angels around the table, especially if the company is at a stage of low or zero traction;
- When choosing investors, bring someone who is resourceful and knowledgeable about your company’s space, otherwise, you might end up wasting time just educating investors about your company’s industry (E.g: Agora’s Series A was preempted at a time when a lot of funds were predicting an hibernation period in the construction industry. They opted to go with investors they already had a strong foundational relationship with, such as Joe Londsdale (8VC);
- Craft was able to raise their Series A regardless of having a market fit for their product established. Ilya credits the success of their fundraising to their enthusiasm when pitching the company, how supply chain was an increasing trend with COVID-19, and the fact that they kept relationships engaged at all times;
Key takeaway: Do your due diligence when choosing who you would like to work with; build exciting relationships; and find experts who will bring more value to the table and help you to scale faster.
Do UK companies need to raise in the EU before coming to the U.S.?
- It’s quite common for UK companies to raise pre-seed or seed money in Europe before coming to the U.S. Most UK companies raise around $500k to $1M from angels or from within their network before raising the seed;
- US investors see it as a positive sign when UK companies have big names backing them up (E.g: Seedcamp, LocalGlobe, Hoxton Ventures, Cherry VC);
- Pre-seed or seed money is a matter of keeping the company alive. Ilya shared that the idea to build Craft came together in 2015, while in London. He raised £1M from Down Ventures, and after that, Brexit made the ecosystem challenge to fundraise. That’s when he decided to come to Silicon Valley;
- Zoom has made it possible to pitch anyone anywhere in the world. If the company is able to show what they have done with the money they’ve raised and have a strategic plan and vision of where they want to go next, the lack of big names backing should not matter.
Key takeaway: It might help to have raised some money in the EU before moving to the U.S., but that’s not a rule. If the company can prove itself, U.S. investors will be happy to take the lead.
Tips for UK founders that cannot be in the US
- Accelerators are a great way to have access to investors’ networks (E.g: Y Combinator, TechStars, AngelPad);
- A well-written cold email introducing your team, vision, and “your why” should certainly work.
How much should you raise?
- If you have a company with a clear and organized business plan, raise as much as you need;
- If you are very early stage (pre-seed) with not much data to determine how much you need: raise as much as possible (without diluting yourself too much, of course!);
- The biggest thing at stake in the early stage is the company’s longevity. If the company dies, that’s a much bigger loss than choosing to dilute another 4-5% of your company, and fundraising so the company can survive;
- If you have already stretched out your company’s dilution, it might be time to recap and work with your Series B investors to clean up your cap table. If you have found at a very early stage a market fit for your product, investors will be willing to collaborate with you.
Key takeaway: In the beginning, try to maximize short-term goals and go after experimentation money. Mistakes will happen; be mindful of them and work with investors who will support you.
Defining dilution and valuation
- Avoid giving up too much equity in the pre/seed or seed. James Green shared a story of an EU company that gave up 45% of their equity in their seed round and warned founders of the risk of operating under these terms;
- Investors want to be in with the best companies, even when that means taking less ownership. “Smaller checks to get in and ability to follow on”;
- Founders should look at the size of the fund before pitching. “Will my idea for this round return the fund?”;
- First offer is unlikely to be best: don’t be afraid to push;
- Create FOMO amongst investors;
- Avoid conversations about pre-money valuation because founders will try to maximize the valuation and funds to minimize it;
- Be very transparent: “We would like to raise $XM and sell Y% in company’s ownership.” Expect this to be the start of a conversation as the investor will also have numbers in mind. Being aggressive is fine but unrealistic isn’t great so do your homework on what’s fair and market.
Key takeaway: Founders need to be transparent and clear on their objectives with the round, while investors’ main goal is to return the fund. Bottom line, work together and aim for a win-win approach.
Do you need to be in the US?
- Since COVID-19, deals are getting more possible and less restricted to where the operations of the company are physically located (E.g: Craft’s last round was completely raised over Zoom. Ilya hasn’t yet met the investors in person);
- Some funds will only invest in a UK company if they do the flip (E.g: Craft was a UK LTD and flipped to Delaware C-Corp in their seed fund led by Uncork Capital);
- Find ways to reduce the emotional distance and discomfort from the U.S investor to your company in the UK. Whether through having U.S customers, flipping to a Delaware C-Corp firm, having someone from your team (if not you) on the ground in the U.S., or keeping relationships alive through video calls, in the meantime when you cannot visit your investor in person;
- Diverse location of the engineering team can be a selling point to investors due to the high pay rates and turnover in Silicon Valley.
Key takeaway: There are great companies everywhere and Zoom has made it possible to develop these relationships and investments globally. Not every fund is the same and has this perception yet, but things are changing rapidly.