As an investment manager, I meet many startups every day. Most of the time, they don’t have a financial expert to lead them through the process of negotiating the terms of the fundraising, neither a legal advisor to provide guidance. Without the basic knowledge of the industry standards, this may either lead to endless meetings and deep-diving into the legal text of the term sheet or accepting everything without question. Either of these scenarios is detrimental for the business.
In the following paragraphs, I’m summarising what kind of financing options should you consider in different stages of the life cycle of your startup. I’m also giving you some hands-on advice to navigate among the countless opportunities of getting investment, that help you to achieve your startup’s goals faster.
I’m also giving examples of typical round sizes in the CEE region. Please keep in mind that the industry is continually changing and there’s a trend of growing average ticket sizes. Still, it’s a good “rule of thumb” to follow in our ecosystem.
Find the type of investment your startup needs
In today’s startup ecosystem, there are several options for your startup to get funding. The countless Venture Capital firms - a.k.a. VCs - angel investors, incubators and other sources of capital make it hard for a startup to navigate and decide whom to approach at which stage. Still, when you know whom to turn to exactly, you can save yourself money, and the essential resource of your startup: time.
Different stages, different needs
The vast majority of startups, who approach us are confused about choosing the right source of capital for their needs. Almost everybody has heard about the phrase “VC”, or business angel, although these terms are frequently misused. More often than not, these startups are having a hard time figuring out which options are the most suitable for them.
To help you choose the best option, we aim to clarify the instruments that are the best fit for the different stages of your business.
#1 Idea, Concept Phase
The very first step towards creating a startup is the formation of the idea itself. At this point in the life cycle of your startup, you should not engage yourself with any fundraising just yet. On the one hand, it‘s not very wise to borrow money in case of a partially tested idea. On the other hand, it distracts you from what you really should focus on: planning your business and finding your core team.
To build a concept, all you need is Excel, some paper and your free time to make your first business model, which you can test among your friends and family.
“A team aligned behind a vision will move mountains. Sell them on your roadmap and don’t compromise - care about the details, the fit and finish” - Kevin Rose, partner at Google Ventures and founder of Digg
When you have all the basics, look for people who are as enthusiastic about your project as you’re - if not more. Many startuppers overestimate the value of the idea itself compared to the capability of execution. Of course, the idea is essential, but keep in mind that without being able to realise the concept, your idea won’t worth more than the computer you use to write it down.
In the early stages, many startups tend to underestimate the obstacles they need to overcome to achieve their goals. Don’t be one of them. Do your groundwork, so that your startup can stand on a stable base.
Possible means of financing:Self-funding
Tips:1. Do your groundwork, ask as many people about your idea as you can.
2. Don’t burn your time looking for external funding at this point.
3. Build an enthusiastic team with all the necessary skills.
#2 Validation Phase
Once you have your team, a great pitch deck, a well-formed business case and you have made sure that your business idea is bulletproof, the time has come for you to start validating your idea.
This is the right time for approaching incubators and potential business partners to get feedback from professionals, do many user surveys and start pivoting your idea - if necessary.
Running a startup is constant learning and adapting to the circumstances. Keep in mind that in this phase, you’re still forming your idea, and sometimes reality differs from what you had imagined. Think of every doubtful conversation or rejection as a useful lecture that helps you move forward. Don’t neglect any criticism.
Validation is time-consuming, and after a while, it becomes a full-time engagement for at least one person from your startup. At this point it makes sense to consider whether to become a startupper and commit yourself full-time to the project.
When you have validated the idea, you need to develop your first minimum viable product (MVP), and as the engagement and the costs are rising, you need to finance yourself somehow.
Until you have your first MVP ready, it’s still not advisable to look for external funding. Investors will take you more seriously if you show your execution skills and that you’re able to develop something without raising funds - even if it’s not a sophisticated solution yet.
To kick the project off on your own, you can either collect funding from your family and friends or use some R+D grants that are available.
Possible means of financing:Self-funding
Family and Friends
Tips:1. Validate, learn, pivot, repeat.
2. Create your first working MVP.
3. Try to finance yourself, ask help from friends and family if needed.
#3 MVP Phase
When your prototype is ready, it’s time to look for your first (pre-seed) investment.
Pre-seed investmentDefinition: A very early-stage investment round of a startup. The usual focus is the development of the MVP, preparing for later fundraising rounds and building a capable core team.
Ticket size: 25k - 150k euros
Pre-money valuation: 300k to 1M euros
At this point, most startups start to deep-dive into calculating the net present value of the startup based on their cash-flow plans. It’s good to have a clear view of what you want to achieve, but usually, with a pre-seed investment, you won’t be able to get the valuation of your dreams. Keep in mind that a pre-seed is a very risky thing to do, therefore usually in return for the early trust, you will have to stay with a lower valuation.
There are several options you might consider at this point: Business Angels, Crowdfunding portals, early-stage Venture Capitals and Accelerators.
Reaching a launch is almost always a time-consuming, and long-winded project. In the prototype phase, you may need to involve several types of investment before entering the market.
Get Into as many Accelerator Programs as Possible, Attend Startup Competitions
At the beginning of the development stage, you’re still pivoting. You have an MVP, you have much information, you made surveys, but very likely you’re still missing a great set of skills to manage a startup. You need to improve in pitching and learn more about the nature of the business.
Startup accelerators are an excellent opportunity to get initial funding, to improve your skills, gain valuable feedback and guidance on how to move on with your startup. Not to mention, that you can get access to the network and community of the program, which helps you grow faster. Besides, VCs could look at the participation in an incubation program as a strong validation later on.
Good to know:MKB Fintechlab also runs an Acceleration program, where we provide:
Investment: Initial 25k euros for 5% equity offer + Possible follow-up funding for top teams upon graduation.
Validation: Pitching opportunities to MKB Bank and our other corporate partners.
Sandbox: Access to MKB’s development and testing environment
Mentorship: Weekly 1:1 session with a dedicated key mentor to help you stay on track
Office Space: Dedicated seats in our co-working space in the heart of Budapest
For further information, please visit our website: https://fintechlab.hu/program/
Gather Angel Investors on Board as Co-investors when Approaching Corporate VCs or as Lead Investors when Going for Crowdfunding
When you start to look for your seed investment actively, you have three main options to consider:
Business Angels are usually freelance investors and benefactors, who are willing to take more risks when it comes to financing a good idea than traditional corporate VCs.
Apart from the funding of an accelerator, in the early stages, angel investors may facilitate the bridging before your next bigger round in the Launch phase. Usually, they provide less funding than corporate investors, so the best practice is to include angels as co-investors in an already ongoing round. The fact that someone is willing to invest her/his funds into your startup can mean a great deal with your ongoing negotiation.
Crowdfunding is a good option, but only if your solution sells to a wide range of audience
Crowdfunding is another option if you can find a well tested and validated platform in your ecosystem, and it’s integrated into the culture. Although, you should only choose this method of funding if your solution is easily understandable, B2C and likeable by a broad audience.
Early-stage VCs usually provide bigger tickets than an Angel Investor, but still, they’re very flexible when it comes to expectations towards the startup. In many cases, early-stage VCs team up with accelerator programs because an investment like this requires deep trust.
Use your pre-seed and seed investment to prepare for later tickets
It’s a common myth from the perspective of the startups that as they move forward with their growth, they get into a better position when it comes to the requirements from these firms. It’s true in the case of the company valuation (because it should become higher and higher as time passes), but in case of control and the data you have to provide, it’s not. As your startup is tending towards the maturity stage, it has to comply with more and more controls and regulations either from possible investors or other regulators.
Instead of taking the freedom and fewer requirements for granted, use these funds and time to establish the operations of your company. Also, do it in a way it that allows you to comply with all the conditions you’re going to face.
Possible means of financing:Accelerator programs
Early-stage VCs (pre-seed, seed round)
Tips:1. Take part in as many Accelerators and startup competition as possible.
2. It’s best to use Business Angels as Co-investors.
3. Use your pre-seed and seed investment to prepare for later tickets.
#4 Launch Phase
Once you have done your first (or second) round of investment, you have launched your product and got early traction; it’s time to approach classic corporate VCs.
Be prepared that what you have been experiencing with your pre-seed investments in the MVP phase are quite different from what you can expect from a corporate VC when it comes to your Seed investment round. Lengthy negotiations, board meetings, milestones and reports are on the way. To prepare for these beforehand, make sure you do all your reports in time and find a good accountant, who will help you on the road.
Seed investment:Definition: After having a validated USP, a seed investment’s main focus is having traction and generating the first revenues of the company to get ready for the series A investment round
Ticket size: 300k - 1M euros
Pre-money valuation: 1M to 3M euros
You need a state of the art business plan, but that’s not everything
When approaching a VC, you need to have a solid business plan, that shows your capability of planning and so that your investor sees that you have a stable view of your business model and concept. In spite of this, they will invest in you and your team, not your business plan. So learn to pitch and sell your startup. Convince them that you’re someone to invest in.
Don’t be afraid to negotiate, but be realistic
VCs differ in their processes and the rights and requirements they’re asking for, but there are specific industry standards, which you should consider when negotiating. Keep in mind that even though you’re confident that your solution will be the next Revolut or Facebook, VCs are businesses and they have to ensure they’re making a profit. Check out some resources, such as Forbes' Guide to Venture Capital Financing for Startups, and be prepared about common negotiation issues before you get into the process.
Still, there is room for negotiation compared to the original terms, but you always have to know what you want to achieve and which are the points you can let go before starting a negotiation.
Always look for multiple opportunities, but don’t waste too much effort
Before settling for a VC, always try multiple options to see which ones are the best fit for your needs regarding ticket size, rights, and which ones are the most open for negotiation. However, once you have a solid lead, don’t waste effort on a deal, you won’t accept and a VC you don’t want to work with.
Possible means of financing:Corporate VCs (seed round, maybe early A round)
Business Angels (as Coinvestor)
Tips:1. Have a great business plan, but it’s you who sells the startup.
2. Don’t be afraid to negotiate, but be realistic.
3. Always look for multiple opportunities, but don’t waste too much effort.
#5 Growth Phase
Once you have finished your first corporate VC round, you have created the product, and you have solid traction, you can concentrate on the growth of your startup. This is the time of further VC fundraisings to get your series A and series B funding (if it’s needed). At this point, you’re already familiar with the process of a VC, and you already have growing revenue and traction.
Series A investment:Definition: Usually occurs when the startup already generates significant revenue from the business model, but still not enough to make a profit. The main goal of the funding is to scale and to become an international startup.
Ticket size: 1M - 5M euros
Pre-money valuation: 1M to 10M euros.
It’s essential to keep in mind that although growth is important and, further investment rounds can help you achieve that, your final goal is to become a well-established, mature company. So don’t get into the trap of living off from one investment round to the other. Your goal is to become the next big tech, not to stay a startup forever.
Possible means of financing:Corporate VCs (series A, Series B)
Tips:1. Concentrate on maturing instead of endless investments.
2. Focus on revenue and profitability apart from traction.
3. Don’t stay a startup!
In the last couple of paragraphs, I have summarized what I regard essential to consider when it comes to choosing the right investment when you need funding for your startup.
The most important, and at the same time, the most challenging task is to know to differentiate among the multiple options and find the one that best fits your needs.
As a startup, your most valuable asset is your team. Don’t let the thought fool yourself that your idea or your business plan is what will sell your company to an investor. It’s you and your team, so always be ready to listen to advice and think about every fundraising and every problem as a lecture that helps you become a better businessman. Following this logic, you have a better chance to achieve your goals.