Investment goes to startups that demonstrate a growth of 15-20% every month
When talking about investments, the first thing that should be identified is what a startup means. Unfortunately, these days any new company is described as a startup, and this misconception prevents attracting potential investors to the industry. Keep in mind the following definitions that explain the main point:
“A startup is a temporary organization created to search for a repeatable and scalable business model.” (Steve Blank)
“A startup is a company designed to grow fast.” (Paul Graham).
These citations describe the topic from different perspectives. While Steve Blank says that a repeatable business model leads to a scalable business, Paul Graham insists on doing everything possible if it results in fast growth.
It's important to understand that having an innovation does not mean having a startup. The innovation becomes a startup when its usage leads to growth.
Growth index is the main statistic to focus on for an investor who is about to fund a young company. For example, in the well-known business accelerator Y Combinator (Dropbox, Airbnb and Ukrainian project Petcube came from there) it is implicitly considered that if a company grows by 6-10% every week, it can become a unicorn (a company that's worth over a billion dollars).
Startups that show good growth perspectives may rely on European market funding. At the moment of closing the funding round, our marketplace Preply was growing 15% each month.
Preply.com is a global online marketplace where you can search for private tutors. It was launched in 2013 and introduced to 5 countries: Ukraine, Poland, Russia, Mexico, and Brazil. In 2015, the web project became a part of the business accelerator TechStarts Berlin and got an investment of $120K. In June, 2016, the startup closed a $1,3M funding round at the European market.
All the stages of an effective investment pipeline
Attracting investment goes as follows. For Preply, the whole process is represented by the following scheme:
- Relevant investors;
- Warm intro;
- Pitch deck;
- Meeting & presentation;
- Marketing due diligence;
- Partner meeting;
- Term sheet;
- Legal due diligence;
- Investment agreement and transfer.
This is a typical pipeline, which is a sequence of steps that any financial deal goes through. Let's take a look at some steps in more detail.
Warm intro: the importance of accumulating your own social capital
It shouldn’t be a problem to find an appropriate investor provided you have researched the market well. What is more difficult is drawing his attention to the startup.
If you write to the investor directly he is unlikely to answer, so requesting a warm intro is a must. You need to find an associate of the investor and ask him to introduce you. You cannot do this without recommendations from partners or other market players.
Here are some examples from his personal experience that relate to the warm intro and finding investments for the Preply e-marketplace.
One of our investors is called Arthur Kosten. He was one of the founders of the Booking.com online platform (estimated at $60 bn), who had been acting as a marketing director for 9 years and built the company himself. I met Arthur at a private conference dedicated to marketplaces arranged by Point Nine Capital, one of the best investment funds of companies in their early stages of development in Europe. The presence at the conference itself was a warm intro for me.
Here is another example, this time it is a traditional warm intro. Mariusz Gralewski, our lead investor, introduced us to the venture fund RTA Ventures. Thanks to Mariusz's recommendation, the probability of making a deal was raised, and after all, they invested into our online marketplace.
If you and the investor do not suit each other you should still take the chance to ask him for a recommendation. He may introduce you to his associates who could be interested in your business.
You should write a letter for a warm intro yourself and ask the closest investor’s contact to forward it. For example, recently I have applied to Yaroslav Azhnyuk with a similar request by sending him an email prepared in advance. Yaroslav added a short cover letter and, as a result, introduced me to the FjLabs fund, whose founder is Fabrice Grinda, a co-founder of the OLX web platform. The fund invests exceptionally well into marketplaces, therefore it was highly relevant to me.
A letter should have the following structure:
- An introduction;
You should include in it brief descriptions of all contact points with the investor — mutual friends and projects they relate to.
- A short story of you;
- A reference that the company is raising the round;
- A proposition to have a 30-minute Skype call;
- Suggested dates and time for the call;
- An information about the startup;
- An attached pitch deck.
The text of the letter is better to save as a .txt document, this will preserve the layout when copying it to the email body.
Communication with the investor, what's next?
Europe has a very fragmented market, investors are distributed within different countries, so a Skype call that lasts about 30 minutes is the preferable format of communication. If they are interested in the project, you can both clarify some details via emails, and the startup gets to the marketing due diligence stage.
Based on the information provided, the investment fund thoroughly analyzes the market segment and the current indexes your company has, and builds the growth forecast. If your marketing due diligence is passed, a personal appointment is scheduled.
Next, financial questions, terms and conditions on providing the funding are considered. Another individual stage is a legal one, which involves verification of documents and communication with lawyers. When all the details are agreed, investment documents are prepared and signed then the money is transferred.
The whole procedure is very complex and may take 6 to 12 months. Keeping that in mind, it's better to apply for 16-18 months of funding. The time you save during the funding process can be spent on the company development.
Analyzing a $1.3M funding round of Preply
This chapter describes in detail the way the pipeline for the Preply web marketplace was developed:
- 150 investors were selected out of 300;
- 100 of them received a warm intro;
*20 of them were known from the very beginning, 30 of them were found during the Techstars event, another 30 were contacts of those 30 investors, 20 of them were found through other people.
- About 100 pitch decks were sent;
- 75 investors were contacted via Skype;
*25 did not respond to the email or said that they were not interested in cooperating right now.
- 45 investors were impressed;
- We moved to marketing due diligence stage;
- Meetings with 20 investors were conducted;
- We agreed the term sheets with 12 investors;
- Only 8 of the investors handled all the legal issues;
- Finally, 8 investors signed an agreement;
- $1.3M were transferred to the company's account.
We created a syndicate, though often this function is done by lead investors. For example, recently the Berlin fund Point Nine Capital decided to invest into Eversports (an online marketplace specializing in booking sports grounds). Venture fund offered to invest $800K into the project and selected all the investors including two from Amsterdam in order to launch the startup there as well. Eversports has now been introduced in Germany, Austria, and The Netherlands.
It's worth saying that the process of creating a syndicate was moving faster when people had heard about Mariusz Gralewski. An important stage in creating a syndicate is synchronizing investors in time. All of them should make a decision about funding at approximately the same time. Otherwise, there is a risk that some investors change their mind, if the round closing takes too long.
I wish you good luck in designing your company and remember that funding is only a means to an end, not a goal. Many companies make good progress without outside investment.