How startups can develop and attract investments now
It is often argued: what is more important - investors or
The venture capital industry includes a large number of players, not just venture capital funds and business angels.The simplest thing is 3F - Friends Family andFools, where projects most often go at the very, very early stages. When you only have an idea and you don’t know where to get the money to implement it, most often you will go to friends, ask family members or people who are ready to invest in the idea - of course, they are not fools. Of course, here are the biggest risks, because when there is only an idea and nothing stands behind it, there is a high probability that this project will not take off, because, as we know, in principle only 1 out of 10 startups survive. And when it’s at the level of an idea, then probably 1 out of 100.
Another tool for early-stage projects is crowdfunding.It is sometimes underestimated, believing that it is emptywaste of time, but it's not. I had a foodtech startup, and we raised our first investments through a crowdfunding platform. Moreover, they found a real professional investor there, who later received a share in the project, and we closed the round a year later.
When a project already has a proven hypothesis, you can turn your attention to Smart Money.So that the startup not only receives investment, but alsoexpertise, connections. We always tell our projects that we supervise to start looking for smart investors as early as possible, and not just a check. For this purpose, there are business angels - these are professional private investors, since they have private capital and they enter into projects with small checks. This is exactly the story of Pre-seed or Seed, you can refer to them here. Everyone has their own focus, that is, you should always pay attention to where a particular business angel invested.
Business angel clubs exist to reduce the risks of a particular investor.If the business angel himself does not want to understandprojects, filter them, he joins the club where deals are weeded out by analysts. Thus, they choose where they are ready to enter themselves, or they collect a syndicate. Sometimes a project project has a large check — for example, $1 million, and a business angel is not ready to invest the entire check himself and wants to share the risks. When several investors gather, one of them acts as a Lead investor: he defends the deal in front of others, and the rest report how much is needed per round. There is an Angels Deck in Russia - it is the largest association of Russian-speaking investors, there are already more than 700 members, and last year they showed tremendous results.
Crowdinvesting platforms exist to collect big checks.There, business angels select projects for themselves, and the checks are often higher. The only obligatory condition is the creation of a joint stock company.
When the startup has already grown and higher checks are required, you can go to venture funds.These are large associations of investors, there arepartners who conduct serious Due diligence. If you can close a deal with a business angel in 3-4 months, then with funds it most often takes six months, and sometimes even a year. Venture funds are distributed in several areas. There are standard venture funds, where there are private investments, and there are corporate venture funds (CVC). Now working with CVC will be most relevant, since private capital is temporarily paused and private investors are a little stormy. CVCs are being actively considered by startups. But such funds have a peculiarity: while an ordinary venture fund can invest in completely different projects, a corporate fund always looks only at those projects that can be strengthened by the parent project. Conditional oil and gas will not look at FoodTech or FinTech projects. Our own Financial institutions—banks—have venture funds.
What investors want to see when startups come to them
The main criterion for evaluating a startup is its market.Often startups come with an innovative idea,when they found a problem that hurts a large number of people. But their market has a ceiling, and once a startup hits that ceiling, it stops growing. And the difference between a startup and a classic business is its ability to grow very quickly and exponentially. Here you need to look at: what is the market capacity now, how this market is growing and what are the prospects. Investors are looking at what will happen to the market in 2-3 years, whether it is now growing due to hype or is it just a trend that it will replace some classic technologies. And also, of course, it is desirable that the market be global. Because investors want scalable projects. This means that there will be a large number of users and revenue increasing year after year. For example, the fact that the market is only Russian will most often be a red flag for investors. Therefore, it is advisable to consider global stories and understand where you can move in order to constantly increase your indicators.
If there is no team, the idea is worthless.Often startups are afraid to voice an idea, fearingthat it will be stolen, but you shouldn’t be afraid of that. Because to implement any idea you need a team. When you come to an investor and tell them who you currently have on your team, what positions are closed, he really wants to hear that you already have a well-coordinated team. If you are doing some kind of technological project, of course, it is impossible to do without a service station - this will also be a red flag for the investor. You definitely need to pay attention to how competent your team is.
If you do not have enough experience and background, it is best to find an advisor.When you show on a slide with your team that you have an advisor who has experience working on a cool project similar to yours, this mitigates the lack of such a specialist in the team.
Investors expect startups to show constant growth - traction.You can’t grow, then fall, then grow again - this will not suit anyone. Your task is to constantly grow from scratch, like a rocket.
What mistakes do startups make?
Everyone makes mistakes - and that's absolutely normal.Unfortunately, there are no training programs that would tell startups how to do it right and what mistakes should be avoided.
Startups budget little time.Most often, a startupper comes and says thatit is necessary to attract investments at least two months in advance, otherwise he will disband the team, because there will be nothing to pay salaries from. It is best to lay at least a year. Then you will have the opportunity to show traction, sales history, increase the number of users, develop your product.
Startups send out their desktop to absolutely everyone.They take a list of thousands of investors, sendeveryone is told that there will definitely be some kind of conversion. Unfortunately, this is not the case, and investors do not take it very well. And since they all know each other, it's best not to earn the fame of those people who send spam. Although this sometimes works, and when we closed the round, this is how we attracted investments. But this is a classic survivor's mistake, when you think that I have already done this once, the second time will also work.
Prepare a Data Room - this saves investors time and effort.This is the place where all documents about yourproject. Many say that they will prepare everything if the investor requests. But in this way you are wasting time. Because when you are asked to provide a financial model, and you say that it is not available now, you are wasting time. It is better to collect all the documents in one folder, and when communication with the investor comes, just send him this link. Investors will appreciate this because it shows your level of preparation and respect.
If a founder cannot defend his project, it means he does not understand it.There are a number of intermediaries who come tostartups and offer to conduct all negotiations with investors for a certain commission or advance payment. This is a very bad story: they don't guarantee anything, but they often take advance payment, and secondly, this is a red flag for investors. Never use the services of third parties who negotiate for you. No one knows the project better than you and can justify it, why there are such numbers, why you cost so much. There are founders who prefer not to dive into numbers. They say that they will simply represent the startup at various events and meetups. This is wrong, because it will be the founder who will have a dialogue with the investor, and the investor will ask for each figure: why are you worth so much, why do you have these particular coefficients in your financial model. If the founder cannot answer, this will also be a big disadvantage. I advise you to sit down at least once and calculate at least a simple financial model of your project. This is also good because you will understand where you are burning more money and where you can cut the bones. The most important thing is that you understand how much you are worth. Without this understanding, you will not have successful negotiations with investors.
Startups often don't understand what kind of investor they need.It's not always just about a person with money.This could be a corporate investment, with which you will have the opportunity to pilot the product in a corporation. You need to clearly understand what kind of investor you need and with what skills. Investors are often toxic: and you need to make inquiries about the person. Not only does the investor choose the project, but the project also chooses its investor - this is an absolute partnership.
Accelerators are included in projects below the market.On the market you are worth 100 million, and they will value you at 60 million. And this must be taken into account.
Accelerators are good because you canwork out the weaknesses of your project, because there are experts who will work with you on this. In addition, this is networking: there you can enlist support - you can get to know investors and keep in touch with them further. But it is undesirable to consider accelerators as a source of financing.
An investor should always carry some kind of value: coming to you with a wallet is not cool.He should tell you:“Guys, I know you need banks. For example, I have warm contacts with managers in six banks, I can make a meeting with you, and you will sell your project.” It's much better if he just says: here is the check, in a month you will report what results you have achieved. It is always advisable to look for those who can somehow strengthen their money.
You should not agree to the first condition.The startup is told:I’ll give you 30 million, I’ll get 20%, and we’ll sign up right now. And for a startup, this is the first investment. They don't read contracts, and that's a big problem. Because when you are given a contract, you need to read every sentence: you can sign yourself to very bad conditions, to the point that if you do not achieve some KPIs that you did not pay attention to, the investor will be able to sell the entire company .
Voicing an assessment of a project at the first touch is the most common mistake.When startups pitch a project, they always say:we attract 500 thousand for 10%. You don't have to do this, but the company's valuation is negotiable. And it would be advisable to get an estimate from an investor, and in response you could give another figure and justify it.
What startups need to do:
- Determine the deadline - how much time you have and how many months you have enough money for. This will be the deadline before which you need to understand whether you have time to look for venture funds.
- It is important to prepare the Data Room, all the documents that you have about your project. They need to be updated and collected in one folder.
- You need to dive into each digit:because investors, when they start due diligence, they will ask you for every number. You need to take care of this in advance and know how you are doing "under the hood" of your project.
- See what deals have been closed recentlythree years in the field of your project, who invested, what were the checks and what were the estimates. You can knock on the door of these same investors and understand how much projects similar to yours cost.
- Make a list of investors who are ideal for youfit with a stretch, but even they do not need to be brushed aside. You need to start mailing with the latest. When you understand what questions they ask you, what flaws you have, you can go to the ideal investors.
- Be sure to use tools such as Facebook posts to get acquaintances and “warm intros” with investors.
How will the market change now?
Valuations of startups and companies will generally fall.It will be necessary to soberly evaluate:how much money you will need to attract and fight for each figure. Previously, you could raise the valuation to 150-200 million, and the investor could agree. There were just a lot of investors, but no cool projects. Therefore, startups could attract investments from American funds and European funds, but now the situation is different.
Now there is an opportunity to approach corporate venture investors.There is an opportunity to change markets, because nowsome markets will be closed for project development. But this does not mean that you need to stop, you just need to take a breather and reformat your project. Maybe for other markets, maybe for a different target audience.
The markets of Asia and India, which have been underestimated for a long time, are opening up.Many projects have now been put on hold.American market and began to enter Asian markets. This is a good opportunity because startups today are in a situation of uncertainty. You do not know what will happen tomorrow, you have to fight off a lot of different tasks. This is another challenge that you just need to cope with, learn how to respond quickly, in no case bury your head in the sand, because life goes on and the development of startups does not stop either. Now is the time when you can take a break and focus on what you used to save time on.
Read more:
American satellite "saw" an unusual message from Earth
Published video from the rocket, which was launched from an experimental accelerator
Giant funnel found in China. Species unknown to science may be hiding there.