Startup Lithuania pre-acceleration course: Startup Guide

Get ready for a continuous fundraising process

For most startups, fundraising is not something that can be done only once and then forgotten. It’s a process that has different stages, strategies, and tactics. Here is the general outline of what the fundraising process looks like:

1. Create your fundraising materials. Basically, this means doing your homework. It doesn’t make sense to go fundraising if you have nothing to show and nothing to prove the potential of your business idea. As we have discussed, you can build a valuable relationship without any fundraising material, but if you want to seek investment in your startup, you must do your homework first.
2. Set up fundraising milestones. For each milestone, be absolutely sure when you need the money, how much you need, why you need it, and how much time you’ll have to raise this amount.
3. Network and build relationships. If up until now networking was suggested as a recommendation, now it is an essential activity. Startups will seldom get funded without serious networking, so don’t bet your success on luck. Actively and consistently build valuable relationships.
4. Collect initial offers and choose with whom to proceed. It’s not much fun only to have one proposal to choose from. So put your efforts into trying to meet as many potential investors as possible and collect their offers. It’s obvious that the more offers you get, the better the odds for you.
5. Sign a term sheet before drafting and managing the legal process. If you feel confident about one of the offers you received, gain agreement on the term sheet before working on the final offer.
6. Close the deal and receive funds. It’s probably the most anticipated moment, but fundraising doesn’t end here. By accepting investments, you agreed to follow particular conditions.
7. Act according to agreed to conditions and report to investors. This step is quite often underestimated as not very important, but that’s not the case. If you don’t act according to the agreement, you might lose the investment you attracted and might not get the next release of funding of cash, in the case of a tranche investment. Investors talk to each other, and if you don’t meet your obligations or spoil your relationship with your current investor, it will be much harder for you to succeed in the next round of fundraising.
8. Know when to start preparing for the next round. Scalable startups don’t limit themselves to a single round of investment. They want to achieve rapid growth and tremendously high valuation. Therefore they go for at least few fundraising rounds which might include: seed round, angel round, series A round, series B round, series X round. The main target of scalable and buyable startups might be the Exit strategy: to sell the company to one of the industry giants (M & A strategy, which stands for Merge and Acquisition) or through IPO (Initial Public Offering).

To go for fundraising, you need to achieve a particular milestones. Otherwise, none of the investors will get interested in your business idea. Seed rounds are easy as you essentially raise money to conduct an experiment. That experiment has to have worked and indicate profitable scalability in order to go to a Series A investment, which is much harder. If you were not able to achieve market validation after consuming your seed investment, your chances of getting to another round are very low. Chances will also be low if you ask for an unrealistic amount of money. Investors will think that you don’t know what it takes to get to the next milestone efficiently.

[su_pullquote]Case study: Tail fundraising[/su_pullquote]The story of Tail illustrates the right mindset for fundraising. Tail is an app that, along with a fashionable clip, helps customers take better care of their dog. This startup is addressing a huge market with significant potential. According to the Euromonitor International report, Pet Industry 2016, there are about 86 million dogs in the European Union with a market value that exceeds €32.2 billion with 2.7% annual growth. Tail is targeting not only Europe but also the global market, which is unbelievably huge. Another opportunity indicator is the exploding wearable technology market, including technologies such as GoPro or iWatch among others, with a whopping CARG of 35% through 2020. The Tail commercialization strategy assumes Poland and Slovakia as the testing and initial entry market (testing MVP), followed by entrance into the UK, France, Germany, and Sweden. Once they establish a presence in these markets, the US and other overseas markets will be addressed.

Even though there is no actual income yet, multiple revenue streams are foreseen. For example, sales of Tail hardware and app, a subscription-based service, advertising within the app, sales of accumulated big data to insurance companies, pet supply stores, veterinary service, and more. The main competitor, Whistle (GPS and Activity tracker), has raised $21 million in two rounds from nine investors but is still trying to conquer this market. It’s important to note that Tail, even though they are addressing a highly lucrative potential market, were not funded on the spot. They had to achieve multiple milestones in fundraising to develop their startup:

• Initial investment of founders: €20,000
• Investment from Deutsche Telekom Venture Fund GmbH: €80,000 
• Investment from Platinum Incubator Seed sp. z.o.o.: €100,000
• EU subsidy of Horizon 2020 in the topic “Open Disruptive Innovation Scheme” for research and development as well as for commercialization plan: €50,000.
• Now they are preparing for the next investment round size of €500,000 at an expected post-money valuation of €2.5 million.

The Tail founders are not just lucky guys who got the attention of investors. They have worked consistently, step-by-step towards the next development milestone. With this persistent effort, Tail succeeded in overcoming the odds (a 3% success rate!) to secure Phase 1 of a high-profile public funding scheme SME Instrument, part of the European Commission’s Horizon 2020 Program. The SME Instrument is an incentive that seeks to boost the best strategic plans of the most innovative SMEs in the advanced technology sector in Europe. An SMEI phase 1 grant for the project’s comprehensive feasibility analysis is a tremendous investment for this company, but more importantly, it paves the way to much higher odds to secure the second phase of the program with a grant of up to €2.5 million towards commercialization of the Tail platform. So, don’t expect fundraising to be easy and fun! Be ready to work hard and stay persistent if you really believe in your idea.