The talent pool of early-stage capital raising expertise is shrinking
The transition from raising private investment to institutional investment can be a huge step for any founder. Whilst the ultimate interests of these different investor types may seem aligned, their mindsets and methods are radically different.
For aspiring high growth businesses, the accelerant of institutional capital — most likely from VC funds — is often a necessity. A land grab strategy will require substantial investment in revenue growth well before the business can even think about self-funding. Making the transition to the first institutional raise therefore becomes essential.
These critical ‘first financings’ usually coincide with the start of early scaling, typically occurring at late Seed or Series A. But the number of these deals has been in freefall since 2014. According to Pitchbook, 2,372 first time financings were recorded in 2014 across Europe. In 2020 the number was down by 35% to 1,531.
The step from private to institutional capital has always been the riskiest funding transition to navigate — sometimes referred to as ‘the chasm’. Even before first-time financings began to slide the chances of a Seed stage company making it to Series A were no greater than 1 in 5.
As we described in our article “Understanding the VC mindset”, this dramatic shift in odds means that fundraising has become more than just an important skill. It is now a strategic competency that startup founders must master.
But, as we have said before, there is no ‘apprenticeship model’ for learning the funding process; it’s often just ‘dive straight in, sink or swim’. This might have worked 10 years ago, but this is now a high-risk approach — one where your instincts are not necessarily going to help.
Founders are engaging in a high stakes sales campaign where they are dealing with very experienced ‘buyers’ who invest for a living. They determine how the game is played but with a set of rules that often seem opaque.
As a founder/CEO the more awareness you have about the limitations of your startup fundraising experience compared to VCs and other professional investors, the more empowered you will be throughout the fundraising process and beyond. Mastery will come from leveraging the knowledge and experience of those that have trodden the path before, then putting this into practice your own way.
But who can founders learn from?
Serial entrepreneurs that have hung up their boots as operators, perhaps after an exit, are eagerly sought after by startup boards. Many become part of a very special talent pool whose know-how gets ‘recycled’ back into the startup ecosystem, often in non-executive or advisory board roles.
But as the number of first financings collapses, so too the number of entrepreneurs that have recent first-hand experience in leading companies through this transition. This particular talent pool is receding. For first-time founders looking to tap this knowledge bank, this is a growing problem.
At Duet, through our early work as a corporate finance boutique, we witnessed this at first hand. By 2017, the writing was on the wall; First-time financings had been dropping for 3 straight years. Many first-time founders and their Boards were reaching deeper into their networks to find the necessary expertise and advice.
The introduction of Investment Analysis as a standalone funding preparation service was our response to this need. This enabled founders to develop highly focussed funding strategies — by first identifying the most likely investors, then developing targeted investment propositions. Founders could then undertake their own funding campaigns with greater confidence. It worked. The feedback we received was unequivocally positive.
The Guided Fundraise
Several founders then wanted us to take a further step — to provide direction on the campaign itself. These were Seed stage startups with first-time founders looking to learn the ropes — to develop their strategic competency for the future. To gradually bring more of this expertise ‘in house’.
But there’s a big difference between ‘leading’ a campaign and ‘coaching’ a campaign. When you have your own hands on the wheel, adjustments are instinctive. When you’re in the passenger seat, you have to think further ahead. This forced us to rework our own fundraising methodology to create a framework that could be used by others.
Whilst every fundraise is different, the core elements remain the same. These form the framework, covering all aspects of investment preparation, investor outreach, navigating the process, and closing. This includes checklists for each phase to ensure nothing is missed.
It’s often the seemingly small things that can really slow the process down — so they can turn out to be the most important: e.g., how to write the cold approach email, how to manage a zoom pitch call, how to prepare for due diligence, how to support the investor’s internal process, how to navigate a term sheet.
But the most valuable aspect is often the one most underestimated at the very beginning — having an expert sounding board available 24/7. Like any complex sales cycle, the unexpected will undoubtedly happen and will often require urgent attention when it does. The clock is always ticking on a fundraise. Having an advisor on hand who’s been down this road many times before can help you save valuable time.
The Guided Fundraise for early-stage businesses is now a fixture. It’s a win-win for both first-time founders and investors. Founders get the leg up they need to develop their own fundraising expertise through a live project. Investors are able to develop a direct relationship with the founders through these formative stages. As an guided fundraise advisor our job is to stay behind the scenes.
The past year has been one of the most testing times ever for startups. Despite the record amounts of capital being invested across Europe, 46% of founders said in a recent study that access to capital was the biggest challenge they faced in 2020.
Yet the entrepreneurial spirit remains undimmed. In the UK, Beauhurst has reported that individual business angels were the only investor type to increase activity between 2019 and 2020. In fact, they had their most active year yet surpassing the record set in 2017.
Startups continue to be birthed and many new founders are beginning their journeys. They will need all the help they can get.
About the author: John Hall is CEO and co-founder of Duet Partners, a UK startup to scaleup advisor that specializes in early-stage company development and capital raising. In the past 10 years, he has advised dozens of founders on the startup to scaleup journey and is a retained Board advisor to a number of UK technology companies.
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