Securing early-stage Startup investment – The VC and Angels perspective
According to the Irish Venture Capital Association (IVCA) report for Q4 2020, earlier stage Startup continued to face funding challenges. Deals under €5m, fell by almost a third (32%) to €194m in 2020 from €285m the previous year. The data shows that the trend accelerated in the fourth quarter of 2020 when deals under €5m fell by 50% to €41m compared to €82m in the same period the previous year. Additionally, the overall number of rounds fell by 18% to 233 in 2020, from 285 in 2019.
The EU and Ireland have clearly identified tech Startup as a true growth strategy and focus area for Europe’s future prosperity. But how will founders graduate from early stage to scale without funding? “We won’t have successful high-growth firms raising €5m-plus in three years if entrepreneurial companies are starved of early funding now” stresses Gillian Buckley when speaking about the IVCA.
Februarys #FoundersCircle brought together 120 founders, VC’s and Angel investor to tackle the thorny issues of early-stage investors including a stellar panel with Niamh Sterling, Hban Investment Consultant Isabelle O Keeffe, Principle at Sure Valley Venture, Barry Brennan, Founder & MD, CapF9, Mike Brennan, Principal in Finch Capital to get the investors perspective on the gap.
Investor landscape in Ireland
According to journalist and lawyer Kelly Earley, “the pandemic in Ireland has mirrored a pattern seen abroad, in which venture capitalists and other investors shore up existing portfolio companies, investing additional sums to leverage government supports and ensure the survival of those businesses”. A consequence of this is that fewer investors are making new investments. Despite this, Isabelle shared her view, that funds don’t represent what is happening amidst Covid-19. Isabelle explained that the ecosystem in Ireland as ‘going on a journey’ which was then interrupted by Covid. “Late 2021 will be a reset in terms of investment” she added.
Panel member Niamh Sterling founder and investor consultant in HBAN, shared her opinion on investment in Ireland last year (2020). She stated that it “wasn’t far off average with a deal size of 250,000. Niamh also highlighted the importance of Scale Ireland. Scale Ireland work on the EIIS submission along with key partners is the type of action needed to make riskier investment more appealing to private investors. See suggested reforms here
“Ireland has historically had low availability of private “angel stage” funding for early-stage tech companies and a high cost of capital. While the Employment and Investment Incentive Scheme (EIIS) was intended to help incentivise the flow of private capital into early-stage businesses in general, it is not well designed to incentivise investment in innovation-driven companies where the risk is higher.”
There were several common pain points that the Founders shared during the panel discussion and breakout room which we will tackle one by one.
- Are you better to set up in Ireland or the States for investment?
- What are investors looking for, what makes you investable?
- Who is getting investment and why?
- Importance of customer validation
Are you better to set up in Ireland or the States for investment?
The US has a more active and established venture capital ecosystem but it is also more expensive to set up there. This Feb Forbes article captures the heat in the US here
“The end of 2020 saw the venture capital market in the U.S. booming. These ‘high spirits’ have quickly spread to Europe in early 2021 and the market has gone crazy. Whether you believe it is a bubble or not is irrelevant. The behaviour change is real. Target metrics for funding rounds are being disregarded, ownership percentages are being flexed down, questions are no longer being asked and due diligence is being dispensed with. Many funds are being forced to spray and pray to compete”. So why would a founder setup in Ireland if it is so difficult to raise early stage funding here? Should we be encouraging our Irish Startup to be looking state side?
One reason to set up in Ireland is its cheaper and down the line you can establish an entity in the states once you have established product market fit. The cheap setup de-risks the Startup somewhat. The supportive Startup ecosystem in Ireland with access to top tier mentors also was flagged as a reason for setup.
What are investors looking for, what makes you investable?
Irish B2B Startups are often more investable thanks to B2C according to Mike Brennan, mainly because B2C Startups need larger markets than Ireland to validate.
Isabelle O’Keeffe view is that economics need to work with investors. B2B is much more “capital efficient”. For B2C, it is hard to get funding in Ireland. If your B2C business is scalable, the question is, “where can you scale?” Niamh Sterling explained that the small market here in Ireland is the thing that makes it so difficult to scale and difficult to raise money for B2C products.
What investors want in a pitch deck varies depending on your audience but there are some super resources available. Andrew Murtagh did a cracking job pulling together the largest collection of Startup pitch decks on the internet. Over 600 from the world’s best Startups which has been a constant source of inspiration for many. https://starthouse.xyz/
DocSend produce a regular report with some great stats and guidance on what investors are looking for, including some really clear graphics on what VCs are looking for.
With VC expectations constantly increasing, you have to question, are the founders keeping up? Investors expect the same type of pitch decks they have in previous years and for later rounds, but they’re spending far less time consuming them. According to the pre-seed analysis, the narrative and the order of the story makes a big difference in successful vs. unsuccessful decks. Potential investors also expect founders to be transparent about why now is the right time to invest. Raising a pre-seed round is more lengthy, and founders have to pitch more investors than what the 2015 DocSend Fundraising Report had previously shown. The data also shows that founder decks are far more differentiated than in previous years, with no one section appearing in every deck.
For Angel investors the format is similar but knowing that the Angel is a different audience from VC and to cater to that audience was key to success according to Niamh. The HBAN have great resources for Startups and a clear formulaic structure to pitches if you want to succeed – HBAN Entrepreneurs Toolkit here
Who is getting investment and why?
Startups in Ireland that the Founders Circle Panellists named as really investable were Accounts IQ – a fintech company backed by a beyond experienced team, Avion, Snapfix, Alien, Buymie and Volograms to name but a view. What have these companies all got in common you might ask? Why are they so attractive to investors?
- A great team
- Scalable vision
Customer validation – a key area that came up in the session
Customer validation is something that keeps founders up at night but there are some super resources available to help, including the wizard of oz MVP and The Mom Test book by Rob Fitzpatrick, a must read for any founder in the validation trenches at the moment. A key take away from any validation is, if you don’t segment your audience you can end up with very varied and contradictory feedback. Segmentation is key to gather valuable data. Before you start customer validation, you may have questions that terrify you. We have all been there, asking the questions that you really DON’T want the answer to, are the only questions worth asking.
Good session here with Justin Wilcox – Customer Discovery: What Do You Ask, with Justin Wilcox
After that https://www.producthunt.com is your friend… or not depending.
Of course Ann Miura-Ko on FLOODGATE’s Thunder Lizard Theory and Achieving Product Market Fit is an oldie but a goodie. If none of this is floating your boat and you just want to talk to other human founders who have been through the journey then join us at the next Founders Circle on March 26th 2021 for Strategic Market Entry and Aggressive Listening – the Pathway to 10M ARR. Secure your spot here.
Some fairly hard-hitting stats from Docsend report reminds founders of the many frogs they have to kiss to find their investor prince or princess…
There will be lots of no’s before you get that YES. Keep the faith. Sometimes it’s easier to manage customers than investors in the early days.
For information on next months Founders’ Circle and to get involved please contact firstname.lastname@example.org