Startup School 6: Why raising VC investment is so hard (…for European, all-female, purpose-driven teams)
Kiteline Health has closed its doors. This is a series exploring what I’ve learnt over the past three years as CEO. Kiteline provided B2B2C health coaching to people with long-term health conditions, helping them improve their lifestyle habits and increase longevity.
TL;DR
- European ventures get way too little cash
- Women and ethnic minorities have a really hard time raising capital
- Most investors are sound, but a few really suck
- VC isn’t for everyone — other options are out there if you don’t fit the mould
- Zebras are the future
Over its three years, Kiteline raised nearly £370k in venture funding from a mix of institutional investors like Antler and SFC Capital Partners, and a number of (truly angelic) angel investors.
One of the main drivers of Kiteline’s demise was our inability to raise seed funding at the end of 2022. There were a myriad of reasons for this. Firstly, the investment market basically tanked in the summer of 2022, following all the warnings from Y-Combinator, Sequoia, Andreessen Horowitz, Lightspeed Venture Partners and others. Despite having landed John Lewis as an anchor client, we did not raise a single pound. I’ve talked about this ferocious landscape in my post about Luck.
Only the strongest ventures (or those with long runways) survived. We weren’t strong enough at the time, as our product wasn’t right and we weren’t very close to finding Product-Market Fit. I believe we were a smart, driven, hard-working team and given the time and runway, we would’ve been able to pivot to something great. But given the lack of funding, we never got that chance.
European startups are starved for capital
As a European startup, our first tranche of funding only gave us £80k net to get going, build and prove something. For two non-technical co-founders on pittance salaries who needed to hire in expensive agencies or developers, that gave us around nine months to prove we had something. If we had founded in the States, we would have potentially received between 2–5x more capital at this stage (see chart below).
According to Crunchbase the median U.S. seed round deal size was $2.3 million in Q1 2023, with an average of $3.6 million. I exported publicly available Crunchbase data, which shows slightly different numbers to their proprietary stuff but tells the same story. Seed rounds in Europe in Q1 2023 were about a quarter of the size of those in the States.
Rushing to build, and ending up with a product that becomes increasingly generic in order to sell right away and prove traction is an unintended consequence of the European venture funding market. With so little to start with, we didn’t have time to build scrappy, test, learn and pivot into something amazing and THEN show genuine traction.
The differences are starting to narrow as the European venture market catches up with an American ecosystem that is twenty years ahead. There is hope for future European ventures to stand a fighting chance with more risk capital at earlier stages to enable more innovation, trial and error and ultimately enough time to find Product-Market fit.
Gender and racial bias in the VC world
We all know how horrible the diversity statistics are in venture capital. Last year, companies founded solely by women (like ours) raised just 0.9% of the total capital invested in venture-backed startups in Europe. In the US it sat slightly better at 2.1%.
The picture is a lot worse for ethnic minorities, and Black women in particular. In the UK, all-ethnic teams received an average of just 1.7% of the venture capital investments made at seed, early and late-stage between 2009 and 2019, with a paltry 0.02% going to Black female founders. And this is not a pipeline problem — Black women represent 42% of new women-owned businesses in the States. WTAF.
One of our (amazing) institutional investors ran a survey for their minority investees asking us whether we ever felt discriminated against during an investment raise.
I immediately said no. But then thinking a bit more deeply about it, I found myself asking how would I even know? It’s not like these days any investor in their right mind would outright say: “I’m saying no because you’re a BAME woman.” Most often biased decisions are made unconsciously.
Actually the question should not be asked of investees, but rather investors. They should be systematically reviewing their own data to figure out for themselves where there has been bias at play – conscious or otherwise. Tracking the gender and race of founders from every pitch they encounter and then looking at what proportions are getting first and final meetings should be standard practice. Given the stats in this market, collecting this data needs to be enforced and then made public – just like gender pay gap is now required reporting.
Why and how does this bias manifest? Harvard Business Review conducted research in 2017 looking into gender gaps in venture funding. They talk about two key factors.
Firstly, the way women and men entrepreneurs are described by investors is vastly different, and plays a direct role in who gets funding. Of the meetings analysed in the graphic below, close to 53% of women had their applications dismissed, compared with 38% of men.
Secondly, the questions VCs ask women and men are framed differently, and the answers given portray businesses in very different lights. HBR “found that 67% of the questions posed to male entrepreneurs were promotion-oriented [focused on potential gains], while 66% of those posed to female entrepreneurs were prevention-oriented [focused on potential losses].”
It would be great to have this sort of analysis done on ethnic biases too.
I didn’t ever think we were being unfairly treated as two female co-founders. Until we participated in an AI-driven investment process for the Boost Fund run by Capital Pilot. To apply, you input business data and the fund invests as long as you hit a minimum score, blind to factors like race or gender. After four months of trying our darnedest to raise and not seeing a single GBP of committed capital, the computer said yes to us with a £50k commitment. I was shocked after months of rejection after rejection.
Was bias at play? I’ll never know for sure. It was a tough market and our numbers weren’t great. But maybe if we had been given the opportunity to sell the big vision a bit more that might have made a difference.
Don’t be too quick to trust an investor
Most investors are great: they genuinely want to help you succeed, and don’t want to waste your time unnecessarily. They also have investment targets and theses to hit. No matter how flattering they are, you don’t have the cash until you’ve signed on the dotted line.
We had ongoing discussions with two firms over the course of Kiteline’s life. We kept them abreast of every achievement and setback, and they outlined milestones we needed to hit for them to consider investing. Even though we “did everything right” by keeping them informed and engaged between rounds and hit those initial milestones — they didn’t invest. They didn’t even take a first meeting for our seed round.
It was a hard pill to swallow. I thought I could count on those two firms to come in for our seed round, but found their goalposts for our milestones had changed so dramatically and so quickly. Having an imaginary milestone dangled by an investor was an all too common gripe among our peer group of entrepreneurs. Another consequence of the crashing market at the time we were trying to raise.
Although the majority of firms act with integrity (besides the bias covered above), there are a few who blatantly do not. One investor in our pre-seed pipeline took two meetings with us, until we found out they had already committed capital to a major competitor. They were conflicted and could not ever invest in us. They were on an unethical data mining mission. So frustrating, not only for wasting our time and getting our hopes up but also potentially destroying our competitive edge.
Stretching the few pennies we had took its toll
As we couldn’t raise what we needed, frugality became key in our last year. We learned too late how best to spend the little cash we had. We were never frivolous by any means and in some cases, we were too conservative on spending money. For example, we found a rockstar UX consultant who did a great one month initial piece of work for us designing our product. We should’ve kept him on retainer, planning for future improvements as our product thinking evolved.
I personally took too big of a financial hit for too long to maintain my enthusiasm. I paid myself an annual salary of just £12k for three long years — it was unsustainable and drained my energy and ability to focus solely on making Kiteline a success. However if I hadn’t, we would’ve folded a lot earlier. It’s a catch 22: one of many decisions founders face along the way.
An area where we spent too much was professional services. Most were unavoidable. Some legal work we should’ve done ourselves in hindsight, such as filing for trademark. Some we did successfully on our own, such as obtaining valuation reports from HMRC.
I wouldn’t want to tally up what percentage of our overall net capital went to legal services. The amount of money we spent on that and investor fees makes my eyes water. Accountants, lawyers, consultants and even investors — all draining money out of startups with very little to start with. It feels like a total racket. All in all, a lot of these costs are hard to avoid and they drain the coffers. Beware & plan for it.
To VC or not to VC?
Successfully going through a programme like Antler puts you on the VC carousel straight away, without forcing you to think deeply about whether venture capital is right for your business. VC works great for one specific type of high-growth scalable tech business.
To founders it often feels like raising VC investment is the only way to grow your business when in fact, there are many other ways. For example, bootstrapping with your own cash or that of friends and family while finding Product-Market fit can be a very good idea.
Having spoken about how European startups don’t get enough cash to start with, sometimes having less cash forces you to innovate and develop real conviction before hitting the gas. Growing organically is another great option. It allows you to work with early clients, understand pain points, what works and what doesn’t, and test cheaply before committing to large, complex and often irreversible builds.
N.B. all of these approaches are sadly only available to those who can personally afford to invest time, money and opportunity cost in building a venture. This makes tech entrepreneurship only accessible to the rich and well-connected. This not only isn’t fair, but robs the world of incredible ideas coming from more diverse communities.
Once you do raise venture investment, there is pressure from investors to grow quickly so the first thing you do is spend your new capital hiring great people, purchasing necessary infrastructure or supplies, and launching sales and marketing campaigns. The moment the money hits your account the clock starts ticking, counting down to the day when it runs out (your runway). At that point, because of the complex operation you have built, you have to let everybody go and shut up shop. It becomes a ticking time bomb.
We got on the VC carousel way too soon. In hindsight, I would have taken more time to work on our value proposition, do more discovery and really understand where the pull in the market was for our ideas and product before raising any investment and effectively “starting the clock”.
There is hope —and it is black and white and striped all over
The VC model works for the few — but for most it is inherently flawed. It is such an inefficient use of capital. Its mandate to deliver outsized returns is expected, but its methodology of finding one unicorn investment to pay for all the other failures results in such a huge waste of resource.
There is hope, however, in a movement called Zebras. Zebras, unlike unicorns, are a real animal. They are profitable companies that improve society, but cannot offer the promise of 10x returns. Zebras fix what Unicorns break is a must-read article that outlines the beginning of a solution to the malaligned VC model.
Zebras Unite.Org fosters a more inclusive, equitable, and ethical environment for early-stage businesses, catalyzing community, capital, and culture for people building businesses that are better for the world. — https://www.zebrasunite.org/
Zebras Unite is working hard to design a new paradigm for venture investing. They have outlined a taxonomy including new financing structures and thoughts on when to use each type.
I hope that as this movement grows, there are more opportunities for purpose-driven businesses like Kiteline to raise, grow and thrive.
Read Startup School 1: Product here.
Read Startup School 2: People here.
Read Startup School 3: Luck here.
Read Startup School 4: Sales here.
Read Startup School 5: Content here.
