What to know before raising your first round?
Tips and advice from deep tech investors.
It can be challenging for early-stage deep tech startups to plan their first round of fundraising. When is the best moment? Who should I contact? How do I convince VCs to be my first investors?
To answer all these questions and more, last month we met with three early-stage deep tech investors:
- Anders Froseth is the founding partner of Propagator Ventures, a Norwegian early-stage deep tech fund investing in Europe and in the US, focusing on AI/ML, electronics, robotics, materials, quantum computing and encryption.
- Julia Davourie is a partner at the seed fund Small World Group based in the Bay Area, investing in North America, Singapore and Europe, focusing on sustainability and health. As such, they invest across energy, water, mobility, advanced manufacturing as well as life sciences and medical technologies.
- Robert Gallenberger is a partner at BtoV, an early-stage venture firm coming originally from Switzerland and investing today all across Europe. Robert is part of the industrial technologies fund, investing in the entire industrial value chain as well as in horizontal technologies like quantum computing, photonics, semiconductors, etc.
Read on to get a recap of their hands-on advice, or watch the replay of our discussion here!
When is the right time to raise your first round of investment?
First of all, there is no set formula. It will depend heavily on your initial funding from non-dilutive sources like grants or government funding.
Ideally, the best funding option is that with no external equity, maintaining 100% ownership. As Julia says:
“The best source of money that you can have for your startup is from your customers (the money you’re being paid for what you deliver), then your own money, then bank money, then Business Angels and VCs”.
So, before running towards equity funding, look at all the sources of capital available in your field, particularly grants and government funding which are better suited when you still face scientific risks. At the earliest stages your valuation is also still low, so it’s better to get non-dilutive funding.
If you need higher funding or a strategic investor, it’s time to look at equity funding. You will need to set out a clear development plan with milestones, and define the amount of funding related explicitly to those milestones. Only then can you start your fundraising process. But don’t wait until you’re running out of cash! Raising funds can take a few months, and it won’t shed a good light on you if you appear desperate in front of investors.
While each deep tech startup will have its own timeline, the best advice is to always look at all your options and, most importantly, to plan ahead.
Finally, remember that VCs can bring also much more to your company than just funding…
Wait, so VCs can bring more than money?
Keep in mind that your investors are long term partners. Some of them, particularly early-stage deep tech ones, can be very hands-on if needed. Your lead investor in particular will probably be your most strategic one.
A lead investor is a VC that usually gives you terms (investment conditions) and puts an initial valuation on your startup, which will help other investors (followers) fund your round. But they also often sit on your board (helping you put one in place if you don’t already have one).
They can provide strategic advice, which could be on anything from hiring new team members to structuring your next financing rounds or helping you with your business development. Most deep tech VCs have very scientific teams and can dive deep into your technology to give you tailored support.
Julia from Small World Group mentioned their network of manufacturers and corporates for example, which is very helpful for organising collaborations or simply helping you to figure out, as Julia said, “what hoops you’re going to have to jump through before you take off”.
As you can see, choosing the right first investors is crucial, because they can really help you structure your venture. This will usually be the role of your lead investor.
How to identify the best VCs for your venture?
When looking for potential investors, it is essential to contact VCs that: a) would likely be interested in you, but also b) would be a good fit for you.
Take time to understand how they work and what they can provide. Besides the investment thesis, look at the fund size, the lifetime and their portfolio. Try to get an idea of what support you could expect from them and what bandwidth they could have for you.
If this information is not available online, ask them directly during your meetings. As Robert said:
“we investors ask a lot of references on you as a founder and company, so you should do the same.”
To help you find your first investors, have a look at our Deep Tech Investors Mapping, listing over 1,200 funds with their investment focus.
What about working with corporates or raising early-stage money from corporate ventures/corporates?
There are many good reasons to work with corporates very early on. They can give you detailed feedback on your product/technology, co-develop it with you, become your supplier, manufacturer or first client for instance.
There are also many more ways to work with corporates than with VCs. When it comes to having corporations as investors, some questions need to be raised. It certainly is an easy way to get both a corporate partner/client and an investor at the same time, and it might help you to convince more investors to join in.
But you also need to understand precisely why they are going to invest, and what are the ties related to this relationship. For example, you need to know if they will become your acquirer down the road, have exclusivity in any way, have information rights, etc.
Corporates have various investment strategies, from pre-acquisition to having independent CVCs acting like traditional VCs. It’s definitely interesting to look into the option of having a corporate investor, but make sure the deal you sign fits your strategy and will help you grow your venture without limiting your future development options.
Once you’ve identified relevant VC firms, who is the best person to contact?
Traditionally, funds are managed by partners, who take full responsibility for investment decisions.
Non-partner employees will focus on sourcing, due diligence, scientific expertise, operational support etc. These are the roles of associates, analysts, principals and investment managers.
That being said, internal organisations can vary, and titles can have different meanings in different firms. Smaller funds for instance might only have an agile core team of a few partners, sometimes helped by external experts (particularly in deep tech when scientific expertise is needed).
Instead of going for the investor with the highest rank, go for the person who has the most chances of being interested in what you do, the one with the background and motivation to understand your technology and your business model.
At the end of the day, remember that everyone is there for a reason and that they all sit at the same table when discussing investment opportunities. Find a champion who will back you up during internal meetings.
Now that you know who to contact, what should you send them?
As investors are sometimes overwhelmed with requests, there are a few key tips to make sure you’ll get noticed. A warm introduction by someone they already know is definitely helpful to get noticed, but it’s not the only way, and it doesn’t mean your message should be any less impactful.
Be clear, concise and state what you’re looking for. As Julia says: “Make it easy for investors”. Get straight to the point. In a few lines, they should understand what you’re doing, know what you’re looking for and have their interest raised to learn more about your venture. A slide deck is always welcome to ease the screening process of the investors.
“Do your homework when contacting the VC, so your message gets better across.”
Follow Anders’ advice and find what will make you stand out. A VC’s website is often very clear about the centres of interest and investment focus of its team. Use this information to find the right person and write the right message.
Be persistent until you get feedback. The channel you choose to reach out to a VC is not extremely important, and what works for one might not work for the other. Sending an email might be the best way to gather all the necessary information, but you can also reach out to them through Linkedin or on the website directly sometimes. Try to switch channels after a while if you don’t get a reply. Even if you get a simple ‘no’, at least you’ll know they’ve looked at your venture.
What do you need to include in your slide deck?
Your slide deck should be short (10-15 slides) and there are some essential elements to include:
- The problem you’re solving
- Your solution
- Your market. Do you really understand it? Have you tested it yet?
- Your business model and how you are going to access your customers
- Your team: who is doing what and what makes your team strong
Specific terms & conditions and valuations are not mandatory. In fact, for a first fundraising, it might be best to keep it for a later discussion and get the investor’s point of view first.
One last piece of advice from every investor we’ve interviewed is: do not ask investors to sign an NDA before the first meeting. As Julia put it clearly: “we’re not in the business of stealing your ideas”.
Investors review hundreds of startups per year, and they won’t sign NDAs unless it’s at the very last stages of the investment process, during the due diligence. You can tell a lot to an investor to convince her/him before needing to disclose very confidential information, and if there’s something you can’t share without an NDA, just explain clearly what and why.
Got your first meeting? Congrats! Now to make it successful…
The first meeting will help investors get a basic understanding of who you are and what you’re doing. If you have a co-founder with a complementary set of expertise (science & business, for instance), it could be best to both take part in the discussion. Here is what you should do:
Get across your key points. You need to trigger interest with your technology, but you also need to sell your project, explain your business model and value proposition and present your team.
Sell your project. Avoid the usual pitfall of deep tech entrepreneurs, which is to focus only on their technology and forget about how they will transform it into a product that customers will actually buy. Even if the investor in front of you has a scientific background and is genuinely interested in your technology, at the end of the day you’ll still need to convince them that you’ll be able to drive revenues. Showing your understanding of the market and your value proposition are key elements in that regard. As Robert confirms, “it’s not because you’re having a very technical discussion that you’re selling your pitch.”
Give milestones. One of the best things you can do is give milestones of what you will do in three weeks, two months, and so on. It’s reassuring for VCs to know you have a plan and can execute it, and it will be an excellent start if you can show your commitment by having reached the first milestone by your next meeting!
Be passionate but realistic. It’s essential to show your passion, but don’t oversell your venture either; like Anders said:
“it’s a bit like dating, you’re trying to establish a relationship, so don’t oversell it by being overly optimistic in sales forecasts for example.”
Leave room for further conversation, and do not reveal everything at your first meeting. Robert shared with us another excellent analogy:
“the first meeting is like a first Netlfix episode, you want to make it interesting enough, but you don’t want to give away everything so people will want to see the second episode.”
Treat it as a conversation. Perhaps the most overlooked yet most crucial piece of advice. Although you’re pitching your project, you are also building a relationship and having a conversation with an individual. Pay close attention to your audience, ask them what they know about your product, if they understand the technology, and adapt your speech accordingly.
Show your interest in the investor. Again, you’re building a relationship with a strategic partner. Ask questions to better understand how they work. Show the investor why you chose to reach out to them and how they can make your company better.
Are there any metrics that investors specifically look for in early-stage deep tech startups?
Contrary to digital and SaaS ventures, deep tech startups can’t be compared through a fixed and unique set of KPIs, particularly at the earliest stages. Investors will instead be looking at signs that show your ability to develop a successful venture.
First, you need to show proof that your technology works, and that you can build a product out of it. You might not have everything figured out yet but you’ll need to show a clear plan on how to get to the market.
Second, and we cannot stress this enough, you need to show that you understand the market, that there is a need for your product, and that you have the right value proposition. You need to be able to assess the size of the market and the value you can realistically expect to capture. If you have access to this market, show some early signs of validation (interest and willingness to pay) through surveys, interviews or early partnerships.
Third, show that you understand the financial side of running your business. This means both knowing and understanding your capital needs (in the short term and your total capital needs), as well as the price point and expected margins to reach profitability at a later stage. It doesn’t have to be extremely accurate, but showing that you have it in mind will definitely set you apart.
As Robert said: “you don’t need to pretend like you know everything”. It’s normal for very early-stage deep tech startups not to have everything figured out, and details can be worked out later. Still, you need to show that you’ve thought about the critical questions and convince them you can make your venture successful.
You can watch the replay of our conversation with Julia, Anders and Robert here.
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