7 lessons learned from €7 millions raised for Luxembourg startups
Tips to raise funds included
I’m part of the team Nyuko, a Luxembourg-based startup accelerator. My role? Supporting early stage startups to raise money from business angels and VCs. Today, I share with you 7 lessons I learned, raising (close to) €7 millions for 8 different startups — from simple deal review to a complete A-Z fundraising support (apply here).
1) Valuation is rarely negotiated
Don’t take me wrong, Investors in Luxembourg do pay attention when they ask you what valuation you expect to raise at. However, I find it rather binary: they either don’t mind it or fully reject it and just leave. Indeed, I haven’t experienced any tough talks around valuation, despite the conventional wisdom. What I try to do is help entrepreneurs I advise to determine a fair price (I wrote about it here), given (i) the amount they’re raising, (ii) their traction so far and (iii) their fundraising momentum. It appears that these prices have been quite well accepted by Investors. But what I’ve also met are unrealistic Investors. I came across a few of them around Luxembourg (they’re a minority) and they seem kind of out of the startup investment game. When an Investor asks for a 500k€ pre-money valuation for a 300k€ round (considering you’re a scalable business), he/she simply doesn’t (yet) understand how much he/she’s hurting their own investment. Your startup will succeed given different risks, among which your ability to raise additional rounds of funding is crucial.
And when startup Founders own too little of the company (a.k.a. the “cap. table”) once they pitch VC Investors, it’s often a no-go. How could you trust that the Founders will work their b*tt off 12-hours a day for the next five years, when their incentive is capped at 20% of the company (potential) exit price?
Smart Investors understand that a too high valuation is not in their interest, but a too low one isn’t either.
2) You find 300k€ business angel tickets in Luxembourg
… but it rarely comes from a single person. But aren’t business angels supposed to be individuals? True. However, I’ve met clever ones that understood how to access the best deals in town. What they do is form a Société Civile (no min. capital, no notarised deed, no accounts publication) for each investment, in which they batch several tickets of ~50k€ each, adding up to a single 6-digit ticket, from the cap. table/entrepreneur’s perspective.
Side note from the individual Business Angel’s tax perspective: a Société Civile setup is exactly as if he/she had invested directly in your company. In other words, should he/she own less than 10% of equity stake and keep it for more than 6 months (kind of always the case), they shouldn’t have any capital gains tax to pay.
3) “Lawyer doing startup deals” in Luxembourg doesn’t mean “Lawyer understanding startup deals”
One of the key moments of a fundraising process, is when you ask your lawyer to translate the 5-page term-sheet duely signed by your Investors, into a heavy ~40-page shareholder agreement. I urge Founders to simply review each and every paragraph. There isn’t a single one of them that I reviewed that did not include any crushing term against the own Founders’ interests (i.e. the lawyer’s client), that was not even included in the term-sheet.
Why is that?
There are about 10 to 20 start-up deals happening in Luxembourg each year (as compared to 800+ in Paris). Each of them requires a lawyer to draft a shareholder agreement, updated status, capital increase meeting minutes,… With a roughly 3k€-to-15k€ budget for each transaction (depending on your round size), we’re looking at a total market of… 300k€/year, for law firms addressing start-up deals. That’s barely more than nothing.
That’s why I never blame any lawyer that enters the Luxembourg startup scene. I fully understand that they simply can’t work from scratch and must use templates / past deals examples to be cost-efficient.
The downside is that I regularly come across either private equity deal terms, that are not applicable to startups or, worse, anti-Founders terms that were not even included in the termsheet.
I can nevertheless assure you that law firms in Luxembourg are on a skyrocket learning-curve with your deals, though I still recommend you to use the help of a middlemen advisor, for a four-eyes review rapid process, at least to avoid raising a toxic round (more about this from me here).
4) Business plans are dead. For real.
Here are the (most of the time) only three documents I prepare to raise funds:
- an email intro;
- a 20-slide pitch-deck;
- a 3-year financial plan.
Although it takes as much time — if not more — as it would to write a 50-page business plan, as many strategic and operational thoughts & talks are put in the process. It takes me and my clients approximately two months of preparation, to get these three simple docs ready. You have one shot with each reader and you’re competing against dozens of other teams reaching their inbox, for the exact same money. You better bring your A game.
Bragging time: It feels I’m doing quite ok in terms of pitch-deck preparation. A few of my clients’ awards were the 2017 Pitch Your Startup Winner, the 2018 Startup World Cup Best Presentation and the 2018 ICT Spring Best Pitch ;).
5) Investors won’t look at your financials in details
And that’s the reason why you should prepare them very well. Huh?!
Again, throughout the deals I advised I realized this was quite binary: your forecast either properly translates the business model and story you’ve told Investors… or it doesn’t.
Here are the type of questions / reactions I receive during Investors meeting — to which the Excel spreadsheets I prepare with my clients now answer right away :
- What’s your cumulated EBIT until break-even, compared to what amount you’re currently raising?
- How have you built your revenue assumptions?
- What’s your annual growth and does it decrease?
- What’s the annual expenses break-down by type?
The theme I find common to these questions is that they’re about trends rather than details. And if one draws trend conclusions when looking at your model, my understanding is that they trust your model is robust and reliable.
6) A deal can break 48h before signing
There was that deal, the obvious one: brilliant tech team, substantial unaddressed market and competition-crushing product. Two months of preparation in and meetings all around Luxembourg and here we are, with a signed term-sheet. What happened then was that we stopped the roadshow and even declined additional Investor meetings. Big mistake. It appears that the term-sheet was signed by a fund led by two Partners, of which one was — without us knowing it — quite reluctant to do the deal. The other one had been pushy enough, until we set the notary date and never heard back from any of them both… It took us an additional four months, to close the round with other Investors. As one can imagine, it’s never a comfortable situation to revert to declined Investors, telling them the previous ones ran away from the deal with no apparent reason.
7) Decent salaries are accepted by Investors
I encourage my clients (and you) to raise the paycheck topic right from the term-sheet moment, making sure this (rather hot) subject is on the table early enough in the process. I’ve seen annual salaries agreed by Investors starting from 35k€, all the way up to 100k€. But make no mistake, the 100k€ Founder was still dividing by two his previous salary.
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Your “clap” would encourage me to write more about fundraising in Luxembourg :).
