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Olsam raises $165M to buy up and scale consumer and B2B Amazon Marketplace sellers
On the heels of Heroes announcing a $200 million raise earlier today, to double down on buying and scaling third-party Amazon Marketplace sellers, another startup out of London aiming to do the same is announcing some significant funding of its own. Olsam, a roll-up play that is buying up both consumer and B2B merchants selling on Amazon by way of Amazon’s FBA fulfillment program, has closed $165 million — a combination of equity and debt that it will be using to fuel its M&A strategy, as well as continue building out its tech platform and to hire more talent.
Apeiron Investment Group — an investment firm started by German entrepreneur Christian Angermayer — led the Series A equity round, with Elevat3 Capital (another Angermayer firm that has a strategic partnership with Founders Fund and Peter Thiel) also participating. North Wall Capital was behind the debt portion of the deal. We have asked and Olsam is only disclosing the full amount raised, not the amount that was raised in equity versus debt. Valuation is also not being disclosed.
Being an Amazon roll-up startup from London that happens to be announcing a fundraise today is not the only thing that Olsam has in common with Heroes. Like Heroes, Olsam is also founded by brothers.
Sam Horbye previously spent years working at Amazon, including building and managing the company’s business marketplace (the B2B version of the consumer marketplace); while co-founder Ollie Horbye had years of experience in strategic consulting and financial services.
Between them, they also built and sold previous marketplace businesses, and they believe that this collective experience gives Olsam — a portmanteau of their names, “Ollie” and “Sam” — a leg up when it comes to building relationships with merchants; identifying quality products (versus the vast seas of search results that often feel like they are selling the same inexpensive junk as each other); and understanding merchants’ challenges and opportunities, and building relationships with Amazon and understanding how the merchant ecosystem fits into the e-commerce giant’s wider strategy.
Olsam is also taking a slightly different approach when it comes to target companies, by focusing not just on the usual consumer play, but also on merchants selling to businesses. B2B selling is currently one of the fastest-growing segments in Amazon’s Marketplace, and it is also one of the more overlooked by consumers. “It’s flying under the radar,” Ollie said.
“The B2B opportunity is very exciting,” Sam added. “A growing number of merchants are selling office supplies or more random products to the B2B customer.”
Estimates vary when it comes to how many merchants there are selling on Amazon’s Marketplace globally, ranging anywhere from 6 million to nearly 10 million. Altogether those merchants generated $300 million in sales (gross merchandise value), and it’s growing by 50% each year at the moment.
And consolidating sellers — in order to achieve better economies of scale around supply chains, marketing tools and analytics, and more — is also big business. Olsam estimates that some $7 billion has been spent cumulatively on acquiring these businesses, and there are more out there: Olsam estimates there are some 3,000 businesses in the U.K. alone making more than $1 million each in sales on Amazon’s platform.
(And to be clear, there are a number of other roll-up startups beyond Heroes also eyeing up that opportunity. Raising hundreds of millions of dollars in aggregate, others that have made moves this year include Suma Brands [$150 million], Elevate Brands [$250 million], Perch [$775 million], factory14 [$200 million], Thrasio [currently probably the biggest of them all in terms of reach and money raised and ambitions], Heyday, The Razor Group, Branded, SellerX, Berlin Brands Group [X2], Benitago, Latin America’s Valoreo and Rainforest and Una Brands out of Asia.)
“The senior team behind Olsam is what makes this business truly unique,” said Angermayer in a statement. “Having all been successful in building and selling their own brands within the market and having worked for Amazon in their marketplace team – their understanding of this space is exceptional.”
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Perform a quality of earnings analysis to make the most of M&A
As a startup founder, there will be three scenarios in which you’ll need to understand how to properly do a quality of earnings (QofE) if you want to maximize value.
The first scenario will be when you decide to raise a Series A and subsequent VC rounds, followed by when you do a strategic acquisition, and lastly, when you sell your company.
This post is a framework for how to think and organize your QofE and go through the most common items that you’ll want to keep top of mind for every M&A and private equity transaction you may be part of.
Why perform a QofE?
The goal of a QofE is to adjust the reported EBITDA to calculate a restated EBITDA that best reflects the current state of the company on an ongoing basis. It also presents a historical adjusted EBITDA that is comparable throughout the last two or three years.
QofE can have a significant impact on a company valuation for three main reasons:
- The adjusted EBITDA will be used by a buyer/investor as the basis for valuation (for companies valued based on an EBITDA multiple).
- The adjusted revenue will be used to recalculate the effective growth rate.
- The adjusted revenue and EBITDA will form the basis of forecasts.
With that in mind, every entrepreneur must understand how to properly form a view of what is the proper adjusted EBITDA and adjusted revenue of your company. It is common for founders in an M&A process to be unfamiliar with the notion of QofE and leave value on the table.
When performed by a professional transaction service advisory team, the quality of earnings is a result of a thorough review of all the documents generally available in a data room.
This breakdown aims to ensure that you won’t be that founder and that you’ll be armed to negotiate your company valuation on equal ground with your investors. If you are in the seller’s shoes, you will get the advantage of understanding how an experienced investor or buyer thinks. If you’re in the buyer’s shoes, you’ll benefit from understanding and valuing your acquisitions better.
How is a QofE professionally performed?
When performed by a professional transaction service advisory team, the quality of earnings is a result of a thorough review of all the documents generally available in a data room. These include, but are not limited to: Legal documentation, financial statements (P&L, balance sheet, cash flow), audit reports, management presentation and contracts.
When doing a QofE analysis, it’s key to consistently ask yourself: “Can or should this information translate into an adjustment of revenue or EBITDA, net working capital (NWC) or net debt?”
Why did we include NWC and net debt? That is because they often have an indirect impact on adjusted EBITDA. Think of an adjustment to the historical level of inventory. Less inventory likely means fewer storage costs. So if you adjust historical inventory, you’ll want to also impact your adjusted EBITDA.
On top of reviewing all the aforementioned documents, your QofE analysis will heavily rely on interviewing management. No matter how long you look at the financials, if you can’t have management confirm information or explain trends, you won’t be able to draw proper conclusions and understand the numbers.
Principles for efficiently building your QofE
- Automatically link everything you read and hear to potential QofE adjustments. This has to become second nature during the engagement.
- Always think about all the ways an event or item that qualifies for an adjustment impacts the financial statements overall. For instance, if the event impacted revenue, did it impact costs in some way as well?
- Make sure that the cost you are adjusting was not already offset by another accounting entry (i.e., had no impact on EBITDA).
- Make sure that the cost you adjust for was classified above EBITDA in the first place.
- Make sure that you can quantify each adjustment in the most objective and rational way. This is sometimes not possible and you may have to come up with a range.
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WhenThen’s no-code payments platform attracts $6M from European VCs Stride and Cavalry
The payments space — amazingly — remains up for grabs for startups. Yes, dear reader, despite the success of Stripe, there seems to be a new payments startup virtually every other day. It’s a mess out there! The accelerated growth of e-commerce due to the pandemic means payments are now a booming space. And here comes another one, with a twist.
WhenThen has built a no-code payment operations platform that, they claim, streamlines the payment processes “of merchants of any kind”. It says its platform can autonomously orchestrate, monitor, improve and manage all customer payments and payments ops.
The startup’s opportunity has arisen because service providers across different verticals increasingly want to get into open banking and provide their own payment solutions and financial services.
Founded six months ago, WhenThen has now raised $6 million, backed by European VCs Stride and Cavalry.
The founders, Kirk Donohoe, Eamon Doyle and Dave Brown, are three former Mastercard Payment veterans.
Based out of Dublin, CEO Donohoe told me: “We see traditional businesses embracing e-comm, and e-comm merchants now operating multiple business models such as trade supply, marketplace, subscription, and more. There is no platform that makes it easy for such businesses to create and operate multiple payment flows to support multiple business models in one place — that’s where we step in.”
He added: “WhenThen is helping e-commerce digital platforms build advanced payment flows and payment automation, in minutes as opposed to months. When you start to integrate different payment methods, different payment gateways, how you want the payment to move from collection through to payout gets very, very complex. I’ve been doing this for over a decade now, as an entrepreneur building different businesses that had to accept, collect and pay payments.”
He said his founding team “had to build very complex payment flows for large merchants, airlines, hotels, issuers, and we just found it was ridiculous that you have to continue to do the same thing over and over again. So we decided to come up with WhenThen as a better way to be able to help you build those flows in minutes.”
Claude Ritter, managing partner at Cavalry, said: “Basic payment orchestration platforms have been around for some time, focusing mostly on maximizing payment acceptance by optimizing routing. WhenThen provides the first end-to-end payment flow platform to equip businesses with the opportunity to control every stage of the payment flow from payment intent to payout.”
WhenThen supports a wide range of popular payment providers such as Stripe, Braintree, Adyen, Authorize.net, Checkout.com, etc., and a variety of alternative and locally preferred payment methods such as Klarna Affirm, PayPal and BitPay.
“For brave merchants considering global reach and operating multiple business models concurrently, I believe choosing the right payment ops platform will become as important as choosing the right e-commerce platform. Building your entire e-comm experience tightly coupled to a single payment processor is a hard correction to make down the line — you need a payment flow platform like WhenThen”, added Fred Destin, founder of Stride.VC.
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How one founder made the most of Y Combinator in a pandemic year
This week, we welcome guest Hana Mohan to our podcast Found. Hana is the co-founder and CEO of MagicBell, a new startup she created with Josue Montano that recently graduated from Y Combinator’s Winter 2021 cohort. MagicBell is a full-featured plug-and-play notifications inbox aimed at developers who want to build one into their own product, but don’t want to have to build one from scratch.
Hana’s experience as an entrepreneur spans multiple companies, including her last one, which she grew to significant success in terms of annual revenue. She’s also a proud transgender woman, who underwent her transition mid-way through her existing history as a founder and entrepreneur. Hana talks to us about the challenges she faced taking on her transition in an industry where the focus is often exclusively on how hard you’re hustling and what you’re building next, and about her origin story as a founder coming from an environment where there weren’t necessarily many examples with similar life experience to look to for inspiration.
During our chat, Hana also shared lots of insight into YC, and what it provides founders, as well as perspective on what it was like going through the program during a global pandemic in a remote context. Finally, she offers some great context on finding your first investors and customers as a distributed team.
We loved talking to Hana, and we hope you love the episode. You can subscribe to Found in Apple Podcasts, on Spotify, on Google Podcasts or in your podcast app of choice. Definitely leave us a review and let us know what you think, or send us direct feedback either on Twitter or via email. Come back next week for yet another great conversation with a founder all about their own one-of-a-kind startup journey.
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Geothermal technology has enormous potential to power the planet and Fervo wants to tap it
Tapping the geothermal energy stored beneath the Earth’s surface as a way to generate renewable power is one of the new visions for the future that’s captured the attention of environmentalists and oil and gas engineers alike.
That’s because it’s not only a way to generate power that doesn’t rely on greenhouse gas emitting hydrocarbons, but because it uses the same skillsets and expertise that the oil and gas industry has been honing and refining for years.
At least that’s what drew the former completion engineer (it’s not what it sounds like) Tim Latimer to the industry and to launch Fervo Energy, the Houston-based geothermal tech developer that’s picked up funding from none other than Bill Gates’ Breakthrough Energy Ventures (that fund… is so busy) and former eBay executive, Jeff Skoll’s Capricorn Investment Group.
With the new $28 million cash in hand, Fervo’s planning on ramping up its projects, which Latimer said would “bring on hundreds of megawatts of power in the next few years.”
Latimer got his first exposure to the environmental impact of power generation as a kid growing up in a small town outside of Waco, Texas near the Sandy Creek coal power plant, one of the last coal-powered plants to be built in the U.S.
Like many Texas kids, Latimer came from an oil family, and got his first jobs in the oil and gas industry before realizing that the world was going to be switching to renewables and the oil industry — along with the friends and family he knew — could be left high and dry.
It’s one reason he started working on Fervo, the entrepreneur said.
“What’s most important, from my perspective, since I started my career in the oil and gas industry, is providing folks that are part of the energy transition on the fossil fuel side to work in the clean energy future,” Latimer said. “I’ve been able to go in and hire contractors and support folks that have been out of work or challenged because of the oil price crash… And I put them to work on our rigs.”
Fervo Energy chief executive, Tim Latimer, pictured in a hardhat at one of the company’s development sites. Image Credits: Fervo Energy
When the Biden administration talks about finding jobs for employees in the hydrocarbon industry as part of the energy transition, this is exactly what they’re talking about.
And geothermal power is no longer as constrained by geography, so there are a lot of abundant resources to tap and the potential for high-paying jobs in areas that are already dependent on geological services work, Latimer said (late last year, Vox published a good overview of the history and opportunity presented by the technology).
“A large percentage of the world’s population actually lives next to good geothermal resources,” Latimer said. “[There are] 25 countries today that have geothermal installed and producing and another 25 where geothermal is going to grow.”
Geothermal power production actually has a long history in the Western U.S. and in parts of Africa where naturally occurring geysers and steam jets pouring from the earth have been obvious indicators of good geothermal resources, Latimer said.
“Fervo’s technology unlocks a new class of geothermal resource that is ready for large-scale deployment. Fervo’s geothermal systems use novel techniques, including horizontal drilling, distributed fiber optic sensing and advanced computational modelling, to deliver more repeatable and cost effective geothermal electricity,” Latimer wrote in an email. “Fervo’s technology combines with the latest advancements in Organic Rankine Cycle generation systems to deliver flexible, 24/7 carbon-free electricity.”
Initially developed with a grant from the TomKat Center at Stanford University and a fellowship funded by Activate.org at the Lawrence Berkeley National Lab’s Cyclotron Road division, Fervo has gone on to score funding from the DOE’s Geothermal Technology Office and ARPA-E to continue work with partners like Schlumberger, Rice University and the Berkeley Lab.
The combination of new and old technology is opening vast geographies to the company to potentially develop new projects.
Other companies are also looking to tap geothermal power to drive a renewable power-generation development business. Those are startups like Eavor, which has the backing of energy majors like bp Ventures, Chevron Technology Ventures, Temasek, BDC Capital, Eversource and Vickers Venture Partners; and other players including GreenFire Energy and Sage Geosystems.
Demand for geothermal projects is skyrocketing, opening up big markets for startups that can nail the cost issue for geothermal development. As Latimer noted, from 2016 to 2019 there was only one major geothermal contract, but in 2020 there were 10 new major power purchase agreements signed by the industry.
For all of these projects, cost remains a factor. Contracts that are being signed for geothermal that are in the $65 to $75 per megawatt range, according to Latimer. By comparison, solar plants are now coming in somewhere between $35 and $55 per megawatt, as The Verge reported last year.
But Latimer said the stability and predictability of geothermal power made the cost differential palatable for utilities and businesses that need the assurance of uninterruptible power supplies. As a current Houston resident, the issue is something that Latimer has an intimate experience with from this year’s winter freeze, which left him without power for five days.
Indeed, geothermal’s ability to provide always-on clean power makes it an incredibly attractive option. In a recent Department of Energy study, geothermal could meet as much as 16% of the U.S. electricity demand, and other estimates put geothermal’s contribution at nearly 20% of a fully decarbonized grid.
“We’ve long been believers in geothermal energy but have waited until we’ve seen the right technology and team to drive innovation in the sector,” said Ion Yadigaroglu of Capricorn Investment Group, in a statement. “Fervo’s technology capabilities and the partnerships they’ve created with leading research organizations make them the clear leader in the new wave of geothermal.”
Fervo Energy drilling site. Image Credits: Fervo Energy
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Black Innovation Alliance, Village Capital team up to support founders of color
Black Innovation Alliance and Village Capital today announced Resource, a national initiative aimed at boosting the efforts of entrepreneur support organizations (ESOs) led by, and focused on, founders of color.
The motivation behind the project is straightforward. ESOs “face record demand, declining resources and are chronically underestimated, underappreciated and underfunded,” the organizations say.
Resource aims to give local accelerators and incubators support in the form of training and community.
Resource’s “ESO Accelerator” will train startup ecosystem leaders on how to build a more financially sustainable organization, as well as help connect them to potential funders. It also will provide milestone-based financial support tied to organizational development.
Resource also plans to build a national community of practice among ESO leaders of color and their funders to share best practices and “develop stronger capital and mentorship pathways” for Black, Latinx and Indigenous founders across the U.S.
Village Capital, says CEO Allie Burns, supports and invest in entrepreneurs “who have been historically sitting in historical blind spots of investors, whether that’s by the problems they’re trying to solve, the geography they’re located in or demographic factors that we have seen lead to capital being concentrated in very few people, places and problems.” Village Capital has worked with more than 100 other ESOs to help grow companies with founders from all backgrounds over the past five years.
The goal with Resource is to help ensure that incubators and accelerators focused on supporting people of color have the resources they need to flourish, she added.
“We want to make sure that those accelerators and other ESOs have the financial, social and human capital to keep their doors open and grow,” Burns said.
Black Innovation Alliance Executive Director Kelly Burton points out that these Black-led organizations are often the first line of support for Black entrepreneurs yet reap few benefits from their success over time.
“They receive very little support and very little funding,” she said. “It’s almost like they do all the heavy lifting, they plant seeds and do all the cultivation but they don’t really get to benefit once that founder and that startup has really taken off. This is an opportunity for us to stabilize these organizations to help them build their own capacities and capabilities so that that organization can be sustainable.”
Resource is supported by a national coalition of funders committed to supporting entrepreneurs of color. The initial coalition includes Moody’s, The Sorenson Impact Foundation, Travelers and UBS.
In related news, on Tuesday we covered New Jersey Governor Phil Murphy’s proposal for a $10 million allocation in the state budget to create a seed fund for Black and Latinx startups.
In that piece, we noted that there are a number of organizations out there that are committed to funding diverse founders.
In February, several national and Chicago-based organizations banded together to support early-stage Black and Latinx tech entrepreneurs through a new program dubbed TechRise. The nonprofit P33 launched the program in partnership with Verizon and 1871, a private business incubator and technology hub, among others, with the goals “of narrowing the wealth gap in Chicago, generating thousands of tech-related jobs and giving $5 million in grant funding to Black and Latino entrepreneurs,” according to the Chicago Sun Times. (Disclosure: Verizon is TechCrunch’s parent company).
Also in Austin, DivInc is a nonprofit pre-accelerator that holds 12-week programs for underrepresented tech founders. Founded in 2016 by former Dell executive Preston James, the organization aims to “empower people of color and women entrepreneurs and help them build successful high-growth businesses by providing them with access to education, mentorship and vital networks.”
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Proving voicemail doesn’t have to be wack, the Slack-backed startup Yac raises $7.5 million
Yac, the Orlando, Florida-based startup that’s digitizing voice messages for remote offices, has raised $7.5 million in a new round of funding.
The company’s service has garnered enough attention to pick up a pretty sizable new round from investors led by GGV Capital and a return investment from the Slack Fund.
Apparently, reinventing voicemail is a multi-million-dollar endeavor.
“The future of meetings will be asynchronous, in your ears and hands-free,” says Pat Matthews, the chief executive and founder of Active Capital, when the company announced its seed round nearly a year ago.
Co-founded by Justin Mitchell, Hunter McKinley and Jordan Walker, Yac was spun out of the digital agency SoFriendly, and was developed as a pitch for Product Hunt’s Maker Festival. The voice messaging service won that startup competition at the event and attracted the interest of Boost VC and its founder, the third-generation venture capitalist Adam Draper.
About six months after that seed round, Yac received outreach from Slack thanks to a referral from another entrepreneur. Throughout their negotiations last year, the teams used Yac to conduct due diligence, according to Mitchell. At the time of the company’s August announcement that Slack had come on to finance the company, Yac had a bit over 5,000 users on its service; it charges per seat, in the same way Slack does.
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How to convert customers with subscription pricing
The lure of subscription pricing is the guarantee of recurring revenue for your business. Once a customer flips the switch to turn on your subscription, it’s easy money:
- Easy to recognize your revenue.
- Easy to determine your margins and profits.
- Easy to enhance your product and extend that revenue out for months, even years.
While that’s true, converting a subscription customer isn’t as simple as flipping a switch. You can build a platform, launch with fanfare, offer all sorts of incentives and trials to attract potential customers — and watch as they disengage and lapse into limbo.
Contrary to popular belief, subscription pricing doesn’t work because of the lower price point that a monthly installment allows.
That’s the actual guarantee that comes with subscription pricing, which will happen unless you cultivate a funnel that catches potential subscribers as soon as they learn about your product and follows them until their very last sign-in.
I built my first subscription-model product in 1999. I’m currently in early-access on my latest, and I’ve launched a bunch more along the way.
While the customer dynamic has changed over the last 20 years, the conversion process has not. In fact, it’s actually gotten easier to convert and retain customers through the subscription funnel.
Here’s what I’ve learned.
Why subscription pricing works
Subscription pricing is a hot trend in just about every business in every industry. Pay-as-you-go is the new normal from software to retail to service.
In my mind, the major shift occurred when mobile phones started pricing unlimited usage per period instead of fixed or cost per minute. Once usage limits were removed, use cases exploded and the promise of a truly mobile computer was finally realized.
Makers of all stripes learned that lesson: From razors to video streaming to accounting software, pricing models have emerged that focus on time periods instead of units.
But contrary to popular belief, subscription pricing doesn’t work because of the lower price point that a monthly installment allows. It’s effective because a subscription reorients each customer’s mind from product function to value proposition.
I don’t care what kind of German engineering went into my razor blades, as long as I have working blades when I need them.
As an entrepreneur, you probably use at least one digital subscription service to build your own product and company, if not several. In fact, just to get to the MVP of my new project, I subscribed to AWS, MailChimp, Zapier and Bubble. I’m still on the free tier of a few more services for some lower-priority features. There’s a few more I quit or never tried.
Thus, you know that value prop plays a big part of whether the customer will pay and stay. So reinforcing your value proposition should play a big part in every level of your customer funnel.
You must catch and track customers to be effective
A subscription-pricing model without an ability to track the steps in the conversion funnel will result in all the headaches of subscription pricing without any of the benefits.
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Cosmos Video — a ‘Club Penguin for adults’ to socialise and work — raises $2.6M from LocalGlobe
All over the world startups are piling into the space marked “virtual interaction and collaboration”. What if a startup created a sort of “Club Penguin for adults”?
Step forward Cosmos Video, which has a virtual venues platform that allows people to work, hang out and socialize together. It has now raised $2.6 million in seed funding from LocalGlobe, with participation from Entrepreneur First, Andy Chung and Philipp Moehring (AngelList), and Omid Ashtari (former president of Citymapper).
Founders Rahul Goyal and Karan Baweja previously led product teams at Citymapper and TransferWise, respectively.
Cosmos allows users to create virtual venues by combining game mechanics with video chat. The idea is to bring back the kinds of serendipitous interactions we used to have in the real world. You choose an avatar, then meet up with their colleagues or friends inside a browser-based game. As you move your avatars closer to another person you can video chat with them, as you might in real life.
The competition is the incumbent video conferencing platforms such as Zoom and Microsoft Teams, but calls on these platforms have a set agenda, and are timeboxed — they’re rigid and repetitive. On Cosmos you sit on the screen and consume one video call after another as you move around the space, so it is mimicking serendipity, after a fashion.
As well as having a social application, office colleagues can work collaboratively on tools such as whiteboards, Google documents and Figma, play virtual board games or gather around a table to chat.
Cosmos is currently being used in private beta by a select group of companies to host their offices and for social events such as Christmas parties. Others are using it to host events, meetup groups and family gatherings.
Co-founder Rahul Goyal said in a statement: “Once the pandemic hit, we both saw productivity surge in our respective teams but at the same time, people were missing the in-office culture. Video conferencing platforms provide a great service when it comes to meetings, but they lack spontaneity. Cosmos is a way to bring back that human connection we lack when we spend all day online, by providing a virtual world where you can play a game of trivia or pong after work with colleagues or gather round a table to celebrate a friend’s birthday.”
George Henry, partner at LocalGlobe, said: “We were really impressed with the vision and potential of Cosmos. Scaling live experiences online is one of the big internet frontiers where there are still so many opportunities. Now that the video infrastructure is in place, we believe products like Cosmos will enable new forms of live online experiences.”
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What I wish I’d known about venture capital when I was a founder
Andy Areitio is a partner at the early-stage fund TheVentureCity, a new venture and acceleration model that helps diverse founders achieve global impact.
When you’re running your own venture — especially if it’s your first — it’s unlikely you will find the time to deep dive into how venture capital firms work. Fundraising is distracting for founders and can even hurt their company in the early days. But if you only start learning about VCs when you’re already down the fundraising path, you’ll already be too late.
Founders tend to make a series of classic mistakes when raising funding. Error number one (and two) is to raise the wrong amount of money and to do it at the wrong time. This double whammy results in founders being very diluted too early or not raising enough money to reach the next funding stage.
They can also put all their eggs in one basket too early. I made that mistake. I had signed a term-sheet (a nonbinding agreement) for a €2.5 million Series A round, passed the due diligence process, and the investment committee had approved the deal. But at the very last minute, a claim from one of the angels on my cap table made the prospect investor change his mind. In a Point Nine Capital survey, founders said that the two most stressful elements of raising venture capital are not knowing where in the fundraising process they are and not understanding why VCs have rejected their proposal.
On the other hand, if you know what VCs all about, you’ll be geared up for the ride, know the kind of investor personality you’re aiming for, and crucially — you’ll optimize the value of your equity in the long run. Founders who manage to raise more VC funds end up having a greater value stake in their company when the time comes to IPO, according to statistical research. The learning curve is steep; you’re not just studying VC as an industry, but the individual investors themselves. So, I’ve decided to share the main lessons about VC that I wish I’d known when I was a startup founder chasing venture capital.
1. It’s not about raising, it’s about raising the right amount at the right time
Startups are all about reaching two milestones: (a) product/market fit and (b) a profitable, repeatable and scalable growth model. Once those two corners are turned, the risk of a startup decreases enormously, which is normally reflected in the valuation. As an early-stage founder, if you want to protect your ownership, make sure you’re raising small amounts of money while your valuations are low.
Save your cash until you de-risk your early-stage startup. Then, raise aggressively when you finally have hard evidence that you have a strong product/market fit and a clear growth model. Be sure you understand when your company reaches that stage and becomes a scaleup. You don’t want to be a founder that has successfully raised a Series A round but has very little ownership and a very long road ahead.
Sometimes, the timing is out of your hands. The price of equity in startups is governed by the supply and demand of capital. Investors themselves have to raise money from another type of investor called Limited Partners (LPs), who may hold stakes in a variety of assets. If LPs have a strong interest in VC assets, there is more supply of capital and the price of startup equity will rise. But the opposite is also true. If you take a look at the last two recessions in the United States (2000 and 2008), you will see that the stock market crash coincided with corrections to valuations in the VC market.
So, be strategic and raise when “the market” has a strong appetite for your equity; otherwise, stretch your runway and wait for the right time. Right now, it’s common to see startups postponing their next raise to 2021, looking for stronger winds.
2. Location: Tell me where you are and I’ll tell you how much you’ll raise
I see two conditions for startups to raise a large round: (a) a large market that can justify a sizable exit, and (b) a large VC fund (small funds don’t need super sizable exits to be successful).
Assuming the first condition is met, where can we find those large VC funds? Typically, they’ll be in locations close to large markets, with a track record of sizable exits.
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