Deep Tech Seed Fundraising during COVID… and beyond
Last Tuesday, at Silicon Roundabout, we hosted our 1st Virtual Meetup — with our venture team, Fly. Venture and other European VCs attending: here are the key lessons for tech entrepreneurs to take away
VC investment is about 50% down. Some investors don’t even take up new commitments. Those that do are taking over a month longer to make up their mind. The situation could not be tougher for startup founders.
What to do, then, when your startup is developing advanced technologies and it still a long way ahead from obtaining serious revenue and customer traction?
The answer is that, even tough it might be harder, it is still possible to get funding.
Through this webinar, with VC-led panel discussion, the Silicon Roundabout tech community of founders and coders set out to discover how.
Deep Tech Fundraising During Covid-19
Matt Wichrowski, partner at Fly Ventures, opened up the session with a presentation about the three burning questions that early-stage tech entrepreneur face today:
- How has COVID-19 affected the Seed market?
- What can founders do to secure funding?
- Are there special considerations for Deep Tech startups?
Covid Effect
Seed investors across Europe agree on the general picture:
“We’re slowing down investment pace.”
“The bar is higher now.”
With about half the number of new investments being made, as compared to the pre-covid period, the first point is a mere fact.
Entrepreneurs, though, were interested in finding out where the ‘threshold’ lies now, so that they can aim for this ‘higher bar’ and still make the cut.
Matt summarised it as follow:
- Stronger traction
- More developed product
- Stronger team
Now, the question was: what practical steps can founders take to hit those marks?
What Founders Can Do About It
Here Matt discussed a few steps founders can take. These could be summarised as follows:
- Practice, practice, practice
- See more investors
- Nurture existing customers / partners
- Build more
- Raise a smaller round
- Go lean
- Lower your valuation
The last point and the first 2 might be pretty self-explanatory: nothing new under the sun, but still important principles to keep in mind for hard times like these.
Points 3 to 6 were particularly interesting for founders and, as someone who’s been running the Silicon Roundabout startup ecosystem for years now, I could not agree more. Founders: do take note.
Nurture existing customers / partners
Investors today are not scared of investing (at least serious investors should not be). What they are concerned about is making sure they invest in companies that are resilient to the coronavirus crisis and its short to medium-term effect.
You might not have a huge crowd of paying clients yet, but those that you do have matter (even partners for pilot projects). Make sure they can reference the need for your service or product. If you can provide investors with a shortlist of people (with ideally some paying clients amongst them) who are prepared to confirm they are not going to drop you, this will make a difference. Traction always matter — now it’s time to be creative about proving this, even if your sales numbers are not that high. What you should focus on is proving that people will still want to jump on board or remain on the boat during a downturn.
Build More
Investors love to see a startup that moves forward. If the market is down, perhaps you can show you are still good at delivering product milestones.
Is this a startup that can ‘switch the remote chip on’ and keep on building? Can you prove investors this situation did not paralyse your development cycle? Prove this and you’ll increase your chances of closing funds.
CAVEAT: Don’t build for the sake of building!
Be laser focused instead on building out what can prove traction during a downturn. Whatever that might be for your case. Every startup is different, however, this is not the time to embark on building some fully fledged multi-tasking platform. This is the time you can prove you are good at prioritising and listening to your target market. If you can show sensitivity to your clients’ problems when their ‘purse is tight’ — you are one giant leap ahed when it comes to secure funding.
In a nutshell: build more, but in small incremental steps that can lead to a measurable progress you can then show investors.
Raise a Smaller Round
A 12-month or 16-month runway is nice for everyone to have. But at what cost?
If you are pressed hard on valuation (and you will be) and if closing the round becomes harder (twice as hard in fact), then why don’t you shorten your fundraising cycle?
If you do so, you’ll win twice: 1) Chances are most lockdowns around the world will be over and less aggressive investors might come back to the market, 2) Your valuation might receive a boost by the increased market liquidity and compensate for any cut you’ll make to it now.
In short: if you’re a pre-seed or seed, consider closing a smaller ‘bridge’ round, then do a late-seed to top up in 6–12 months, before your Series A. Mezzanine rounds for later stages can also come in handy.
Go Lean
It sucks but it’s the reality — if you are to show resilience and close funding, this is not the time to go on a spending spree to conquer a mega-milestone.
If you’re startup is one in the lucky sectors where demand has been boosted by COVID-19, by all means do hire a bigger business development and double down.
For everyone else, keep focused on a super-tight lean cycle: keep the Minimum Viable Team, with Minimum Viable Costs, to build Minimum Viable Product (versions), and achieve Minimum Viable Milestones.
Iterate as fast as you can and prove your resilience. You’ll be forgiven for not making loads of revenue if you are an early stage tech startup — but you must prove you can build, ship, learn, improve and hit the next goal.
What About Deep Tech Specifically?
In a blog post of his that he referenced in the presentation, Matt defines Deep Tech pretty much like we do at Silicon Roundabout:
A product that’s deeply rooted in advanced technology — i.e., building was not possible until very recently
A core offering built upon the technology itself as opposed to brand, network effects or regulatory certification
Technology that’s novel and very difficult to replicate, providing strong defensibility — i.e., no commoditized algorithms or open source data sets
Long product development cycles and higher capital requirements (but not always)
Typically close links to the latest academic research
In that post he had already explained why investing in Deep Tech startups actually makes sense now:
[early stage Deep Tech startups are] uniquely immune to the effects of economic recession (…) because all they really need to do is build.
During the presentation he goes a bit deeper into defining what is the condition for this to hold:
Startups need to prove they are client-independent.
That is to say that Deep Tech startups by definition can outstrip the competition by the superiority of their ‘transformational tech’. Therefore, what they should be proving is that to gain the ‘high ground’ in 6 months or so, they genuinely only require:
top talent, powerful laptops, a bunch of cloud credits and (now) a video-conference account to keep going.
Compared to startups that rely on distribution partnerships or large field sales teams, the advantage for these startups is clear.
Deep Tech startups can therefore win investors over if they can retain their means of production and, while the world’s on hold, they keep going.
Problem: Not all investors think like us at Silicon Roundabout or Matt and the Fly Venture guys. They might not even know what to look for in an early stage Deep Tech company.
To address this and other issues, we opened up the Expert Panel Discussion.
Lessons for Startups from the Venture Capitalist Panel
In attendance, besides myself and Matt, we had:
- Rick Hao, Principal at Speedinvest, (LinkedIn)
- Mirela Yordanova, Associate at LAUNCHub, (LinkedIn)
- Rokas Peciulaitis, founder of Contrarian Ventures, (LinkedIn) and
- Lomax Ward, General Partner at Luminous Ventures (LinkedIn)
Rick fired off the chat by doubling down on the ‘high bar’ that founders need to jump:
In his opinion, ultimately it is all about proving that the team can deliver.
When meeting in person is not possible, references are your best friend: make sure you can provide plenty of solid ones that can testify the need for your product and your capacity, as the founding team, to deliver.
Operations is the next company aspect to keep tidy when approaching investors. How does the machine work, now that the coronavirus has frozen the world? Make sure you can prove the resilience of your internal structures and processes.
Founders should also expect to provide more on the Due Diligence (DD) side. It will take longer to complete and investors will ask for more details, since the ‘personal feeling of trust’ is hard to establish on a series of videocalls.
You will have to be prepared for a much more thorough assessment of your business and your founding team.
The good news is that VCs don’t like to be paralysed.
At Speedinvest, Rick claims, they are proactively building out a system to handle more dealflow even whilst stuck in a remote-only environment. All the other Venture Capitalists agreed the same was true for their respective fund.
Building trust a big hurdle?
Yes. Mirela, for example, confirms that LuncHub is open for business, but that out of the 2 deals done this year, none were initiated entirely remote.
She asks “how can founders build trust? I doubt most VCs have a definitive answer for this”. She then asks the other panellists how many fully-remote deals they had concluded and no one seemed to be able to confirm this has happened yet.
Despite this, there was a general consensus around the fact that a fully-remote Due Diligence process takes longer and that, in principle, all the attendees were up for investing in teams they had never met before — as long as they understand it will take longer and they will be asked to prove their resilience in this market downturn.
Pro Tip: Invest in some decent broadband hardware! There is nothing more annoying that being unable to see your stream properly. And if you fail to prepare (for the investor meeting), you are preparing to fail (what is possibly your only chance to shine!). Also, do show your face. A black screen is not an option to build rapport.
Younger VC Funds Could Be Your Best Bet
Lomax points out that not all VCs are created equal. He can’t speak for large old-school funds, but his own is relatively new and his small team is used to travel across Europe and work remote.
His gut feeling is that younger funds, who have already been themselves relying on remote technologies, will be naturally more inclined to back companies they can’t meet.
Bigger Might Be Better — Especially if they ‘spread’ their bets
Rokas agrees with Lomax but offers another tip for founders. Maybe bigger funds can also be a good target, if they are renown for making a high number of smaller commitments.
He observes that funds like Seedcamp, who have been successfully raising a series of funds of increasing size, but kept writing a high number of smaller first cheques, might be a good target for early stage teams.
Find Your Match, Be Persistent and Get and Intro
The panel agrees: with no travel allowed, inbound online requests have increased.
This is raising pressure on venture capitalists, who might not be able to take serious notice of all these cold requests, whilst also looking after their existing portfolio.
The answer?
- Do your DD on investors
- Be persistent
- Get an intro
We said it before: not all investors are created equal. You MUST ensure you are focusing on those that matches your startup.
Does the fund invest in B2B or B2C? Does the fund back high-tech or low-tech teams? Do they fund seed, pre-seed, or later stage? What’s their geography?
Crunchbase is your friend when it comes to VC due diligence, since you can check past investments. However, most of the times, you can start finding key information on each VC’s website.
At this point of the panel I brought up a less-known aspect of VC funds: they need to raise money from investors themselves and might not be in a position to invest, even if they like your company.
The crowd jumped on the panel, curious to find out how VCs actually raise cash from investors. The whole panel replied that it’s pretty much like for startups — but with no ‘pitching events’, virtually no chances for cold reaches to work, and virtually no investor who likes new funds. The panel was also candid about potential issues with capital availability that COVID may cause: since VCs do not ‘sit on their cash’, but draw it down progressively from their own investors, COVID might make such investors drag their feet. Sometimes, the VC might be simply out of money and in need to close a round before new investments into startups can be made. Again, COVID might be an issue in this case.
How can a startup find out if a VC has money? It’s hard to be sure on this one, but it’s a factor that you might need to keep in mind if you are about to raise a round.
Check online for evidence of investments made recently by the fund. Follow their partners on LinkedIn. Find their record on Crunchbase.
If you can’t find conclusive evidence, that’s ok. In any case, if you do get to the stage of talking to them, you can be upfront and ask whether they will be able to deploy and to what timeline. Don’t assume all VCs can invest at any give time.
In order to get to that conversational phase, and then from there to move things forward, you must be persistent.
You will be fighting for attention with 100s of other emails and messages: your objective is to get to an answer ASAP. If you don’t get a yes or a not regarding moving to the next stage, it is your job to follow up methodically.
Investors like hustlers.
Even better, on top of being persistent and after doing your work prospecting your VC leads, you should aim to get an intro.
A warm intro to an associate, a partner or a GP may or may not only increase your chances of getting funded — but it will help you get attention. That’s already a massive step forward.
Check their LinkedIn connections and find out who could be that bridge… If you can’t see common connections: you can still build one out. Previously funded entrepreneurs or ecosystem players like Silicon Roundabout could help you build the bridge to the VC contact you are aiming for.
3 Seed Startups Raising Right Now
After such an intense panel discussion, the event ended by featuring the presentation of 3 startups, which are currently raising their Seed round.
First up was Lanterne, presenting their ‘Crowdless’ app:
Crowdless — pitched by Alex Barnes
Lanterne presented their free app Crowdless, which has been downloaded over 36k times in the last 3 weeks, to help users observe ‘social distancing’ more effectively.
The ‘Crowdless’ app helps people make informed decisions and navigate more safely as they carry out their essential tasks, providing real-time live data on the busyness of essential places that people need to visit, such as supermarkets and pharmacies.
Lanterne co-founders Sebastian Mueller, Alex Barnes and Yohan Iddawela were already using satellite technology to help people in conflict zones to navigate safely.
The are now raising a Seed round to support the product development for 12 months and welcome non-monetary support in the form of introductions to corporate partners.
The future post-COVID? Expand this technology to help businesses such as cafes, restaurants, and bars to manage crowds and queues.
Want to know more, here is their website: crowdlessapp.co
The next presenter was entrepreneur Doron, who pitched L7 Defense:
L7 — Pitched by Doron Chema
The L7 team built the Ammune cybersecurity defence system to protect APIs from hackers.
Doron stressed that, due to COVID-19, internet services consumption increased. The internet of today, runs on APIs (aka Application Programming Interfaces — or the bridges that define interactions between multiple software intermediaries). A higher usage of these APIs, imply more risks of becoming victims of hacks such as DDoS, as well as higher stakes if a web system went down.
They are raising funds to scale up their customer base and target what they see as low-hanging fruits that can’t afford not to invest in cybersecurity for their APIs.
Doron listed in particular Cloud-native Enterprises, Telcos and Financial Institutions (think OpenBanking API).
Can L7 be the answer to these companies’ API hacking problems?
Find out on their website: www.l7defense.com
Finally, the last presenter was DeepZen, a startup currently being accelerated by Silicon Roundabout’s sponsor Oracle for Startups.
DeepZen — Pitched by Taylan Kamis
DeepZen reads text that sounds human.
Their technology reduces the cost of production for sector-specific voice solutions to create audiobooks and voiceovers and speeds up the process significantly.
They partner with publishers, media outlets, gaming companies and advertising agencies to provide high-quality voice solutions.
DeepZen raised a 1m at pre-seed in 2019 and built built a product that literally make machines sound human: Like this example on their website.
Now they are back on the market looking for investors.
Wan to find out more about what they do? Check them out→ deepzen.io
Deep Tech Fundraising During Covid-19 — Summary
If you’re an early stage tech startup developing some groundbreaking technology, COVID-19 might be bad news. Maybe though, not as bad as it might be for others.
If you are about to raise funds, or fundraising right now, the investors who attended this webinar seemed to agree on what you should do, to maximise your chances:
- Practice your pitch — you must make the most out of every chance to grab investors’ attention.
- See more investors — you never know who will actually write you a cheque.
- Nurture existing customers / partners — references will be a key to prove your viability as an “investable team”.
- Build more — focus on building out technology features that will give you an unfair advantage against the competition.
- Raise a smaller round — your focus should be on bringing home the cash now, even if it means a shorter runway and a top-up round later.
- Go lean — manage your resources with care and focus on a fast development cycle to hit milestones that matters with the least possible cost.
- Lower your valuation — if you have to.
- Prove to be client-independent — especially if your value proposition lies in delivering new technology that can be developed during this period of slower market, ready to explode post-COVID.
- Be prepared for a longer and more detailed due diligence process
- Invest in strong broadband facilities — your internet connection should be fast and not glitch out.
- Do your own DD on investors — even before you approach VCs, make sure you will be a fit for them. Also, make sure you clarify if they are deploying capital or not right now.
- Be persistent — you must be a hustler when you don’t hear back.
- Get an intro — your chances to get a pitch and move on to the next stage will increase substantially.
So there you have it: here is what we discussed at Silicon Roundabout’s “Deep Tech Seed Fundraising during COVID” webinar.
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