Nauta Capital launches new pre-seed initiative for European deeptech startups
Source: Nauta Capital Nauta Capital, a leading pan-European venture capital firm investing in capital-efficient B2B software companies, has today launched a new initiative to support pre-seed deeptech European startups. Called ‘Nauta Labs’, the specialist venture programme will offer pre-seed B2B deeptech companies capital to accelerate their concepts and grow into the next generation of Europe’s deeptech category leader. According to the European Commission, Europe’s deeptech companies are worth a combined €700 billion, making Europe a rising digital power and a hotbed for deeptech startups to flourish. Despite this potential, research shows that only 20-30% of pre-seed startups in the deeptech space receive funding due to extended R&D needs, while funding for seed-stage startups in the UK fell by over 80% in 2020 according to research by Plexal and Beauhurst. Inspired by the scarcity of capital available for pre-seed and pre-revenue B2B deeptech companies, Nauta Capital’s new initiative will back 12-16 companies for the next 12 months to bridge this gap and fuel the next generation of deeptech startups in Europe. Focusing on deeptech companies within verticals such as cybersecurity, quantum technologies, advanced AI/ML, commercial open-source software, and developer tools, Nauta will invest between £100K – £250K (around €117K – €292K) per startup through its Nauta Labs programme. Open for applications now, startups fitting in these verticals are encouraged to apply for the opportunity to access capital and expertise from the programme’s investors. Leading the Nauta Labs programme Nauta Capital’s Venture Partner Pratima Aiyagari said: “The Nauta Labs program will explore areas which are foundational for the coming decades and the mainstay of the current shift in software consumption patterns that have emerged – from quantum to AI. R&D Labs across Centres of Excellence and Universities in Europe are working on some of these hard problems. As scientists and entrepreneurs stand at the cusp of spinning out their businesses, we would like to partner with them on the journey towards commercialisation.” While the programme officially opens today, several startups ranging from cybersecurity, network management to open source have been offered pre-seed investment under the Nauta Labs umbrella. Nauta Capital will continue to invest in Seed to Series A through the fund it launched with a €120 million first close in 2020. While the primary thesis for the VC firm remains on investing in capital-efficient B2B software companies, Nauta hopes to further invest and co-invest in the startups accepted into its Labs programme as they mature and commercialise their concepts. Nauta Capital’s London-based Partner, Carles Ferrer said: “Nauta Labs fits well into our main B2B approach and making sure we can back future deeptech winners from the start, and Pratima has a fantastic experience to lead this effort.” Nauta’s main areas of interests include B2B SaaS solutions with strong network effects, vertically focused enterprise tech transforming large industries and those leveraging deeptech applications to solve challenges faced by large enterprises. With over 60 investments, and more than 10 exits including Brandwatch and recently announced Holded exit, Nauta is one of Europe’s largest and most active B2B investors. EU Startups: By Charlotte Tucker - June 30, 2021
How to move from prototype to minimum viable product (MVP)
Microsoft Startups 6/3/2021 1. Collaborate with the right technical professionals When you're ready to begin building a working product, you'll want to first find a collaborator who has the right knowledge and experience to help you. Even if you're confident about your technical expertise, having a partner who can provide diverse business insight, or a specific technical skill is a big asset. While many founders may find short-term hires and engineering interns valuable at this stage, keep in mind that not every partner will provide you with the support and commitment you need to work efficiently and effectively. Lindsey Goodchild, Co-Founder and CEO of Nudge, a communications platform that empowers deskless employees to drive better business outcomes, said that she teamed up with her now co-founder to build her MVP only after losing time and money with an outsourced development agency. "When you're starting a tech startup, I recommend having the technology chops in-house from the start," she said. "Even though you might get by from outsourcing your MVP, you have to have capital to do it, and it might not give you best the product in the long-term." 2. Test on the right users By now you should know that customer feedback is crucial for a successful startup. Once you've built your MVP, the relevance and usefulness of any feedback session will depend on who is testing. This means you need to include both purchasers and end users in your sessions. Julia Regan, CEO and Co-Founder of RxLightning, a digital platform that automates specialty medication enrollment, carefully curated her MVP testers to ensure they were also her target customers. "We identified beta groups based on specific experience within the healthcare technology industry," she said. "By narrowly targeting this group, we had interest the moment our MVP was ready." Goodchild noted that she made sure to test her MVP with hundreds of end-users who were employed with a potential customer. After the users downloaded the app, her team conducted focus groups where each employee shared what they liked and what they didn't like about it. "I think a lot of founders forget that their purchaser might not be their overall end user. And then there's just a lot of boxes that are left unchecked when developing their MVP," Goodchild said. 3. Be creative with your feedback methods Whether you are testing with a purchaser, end-user, or both, keep in mind that many testers will need encouragement and direction. You can enable them to provide useful critiques with these creative feedback ideas: - Ask customers to speak their thoughts out loud as they use your MVP. - Let customers take a collaborative role in your design by asking them write, draw, and sketch to demonstrate their idea of an improved feature. - Create a second version of your MVP with a few different features or designs to gauge reactions with separate groups. Creative thinking can also mean re-imagining how to gather feedback at all. For Regan, this came into play when doing beta testing at home during the past year, when everyone was working remotely. "It wasn't ideal, but I ran customer discovery sessions virtually, showing features on screenshares and asking questions around them," she said. "If I've learned anything, it's that if you want to keep moving forward with your product and startup, you have to stay flexible." ref: https://startups.microsoft.com/en-US/blog/mvp
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Accelerators Vs Incubators: How to Choose the Right One
For startups, the range of funding options is overwhelming. Do you crowdfund or get a business loan? Incubate or accelerate? You know you need capital to grow your business, but have a limited amount of time and energy -- you want to make sure to choose the funding option that gives you access to the best connections and opportunities, but aren’t sure where to start. Most startups dream of being accepted into a world-class mentorship program and the chance to pitch big-name investors, but don’t know the difference between two of the primary funding options that provide these opportunities: accelerators and incubators. ACCELERATOR VS. INCUBATOR: WHAT'S THE DIFFERENCE? We'll dive much deeper into the specifics below, but here is the main difference between incubators and accelerators: Startup incubators help entrepreneurs refine business ideas and build their company from the ground up. Startup accelerators provide early-stage companies that already have a minimum viable product (MVP) with the education, resources and mentorship needed to promote what might otherwise be several slow years of growth into a few short months. Business Incubators and Accelerators: The National Picture Often used interchangeably, accelerators and incubators actually serve different purposes, have different outcomes, and accept different kinds of startups. Knowing the difference helps you focus the search for funding in the right areas, and improves your chances of success. By the end of this article, you’ll know the differences between these two important funding sources and be able to determine which is right for your business. STARTUP ACCELERATORS In this section, we’ll look at the key components of an accelerator program, application process, program duration, investment capital, and main benefits compared to an incubator program. What is a startup accelerator? source: masschallenge.org A startup accelerator is an organization that offers mentorship, capital, and connections to investors and business partners. It’s designed for select startups with promising MVPs and founders, as a way to rapidly scale growth. Examples include MassChallenge, Techstars and Y Combinator Is an accelerator program right for your startup? Accelerators are for startups that already have an MVP that has been validated in some way -- that might mean a product with a few paying customers, a group of free users, or early signs of strong product-market fit. The acceptance rate for accelerators is low since thousands of startups apply for the programs and there’s a limited amount of capital, physical space, and mentorship time available. Accelerators often take a cut of equity in exchange for program placement. Solo founders with unvalidated ideas are a better fit for incubators than accelerators, because incubators work to help formulate a business model and team over a longer period of time. Accelerators are right for startups that are ready to scale, not startups engaged in customer development and trying to find product-market fit. Duration of Startup Accelerators Accelerators are intense and fast-paced, taking 3-6 months to get an early-stage startup ready for market. Typically, startups have done a lot of the legwork to prove their product before going into an accelerator program; startups should be able to attract investors after just a few months of mentorship and growth. Application Process source: masschallenge.org Accelerator programs accept startups cyclically in cohorts --this means there’s between 45 and 90 slots every year. At most accelerators, the application process is done in stages: Application. An application will ask for specifics on a startup’s idea, market, traction, team, and other aspects vital to success. Assessment. Promising teams from the pre-screening phase move on to be assessed for investability, revenue potential, and overall strength of the product/service offering. Interview. At this stage the accelerator is very interested, but wants to know about the team, product and evidence of traction. The interview process typically takes 20-30 minutes. Evaluation. Interviewees provide documents to prove their statements about revenue, legal standing, or any claims made about the company. Acceptance. Upon completion of the final evaluations, the investment committee will meet to finalize where the funding will go during the 12-16 week program. Roughly 30-60% of the teams that made it to Assessment phase will receive funding. Tip: Throughout the application process, write concise answers that leave room for future conversations. Create interest in your proposal but don’t try to answer every possible question. Make it easy to access critical business information with links to slide decks, LinkedIn profiles, videos, references, and anything else you think would help investors realize the potential of your startup. Investment Capital Capital is a big part of why startups seek out accelerators. There’s only so far expert guidance and an extended network will take you; sometimes cash is an absolute necessity to support a growing team and product. Almost every accelerator out there provides capital in exchange for a percentage of your company’s equity. For example: TechStars: up to 10% AngelPad: 7% Y Combinator: 7% This becomes an issue later down the line, when dealing with equity dilution between the various investors that went in on your seed, series A, and so on: Do you have a prototype or MVP? source: masschallenge.org According to Franco Iovi Vollbrecht, who reviews applications for Start-Up Chile, almost all accelerators will require a minimum viable product from startups they consider. Since they’re looking for high-growth potential companies who have a likelihood of becoming successful in just a few short months, accelerator programs need to see more than a concept. An MVP is what it sounds like: the leanest version of a product or service that actually works and demonstrates its use case. Eric Ries, defined an MVP as that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort. For example: The Dropbox MVP didn’t have comments, collaborative document editing, or enterprise-grade admin control. It was a way to put a file on the internet and retrieve it later. source: masschallenge.org That’s the kind of thinking you should apply when creating or evaluating your own MVP -- does it do one well enough to deliver value to customers? Note: Startup teams often make the mistake of over emphasizing the minimum part of MVP at the expense of the viable part. i.e the product delivered is not quality enough to provide an accurate indication of whether or not a customer will actually use the product. Use this checklist when evaluating your MVP: Is it fit for its target user? - Does it offer the user value (saving time, money)? - Does it solve the problem you promised to solve? - Does it give the user a good idea of what the final version will look and feel like? Benefits of an Accelerator The benefits that come with putting a group of talented startups, investors, and business decision-makers in one campus are clear: - One-of-a-kind networking opportunities. Get access to opportunities with well-established companies and influencers. - Personalized guidance from serial founders and investors. Accelerators work with angels, VCs, and seasoned founders -- they may even end up investing in accelerated startups at the program’s end. - Collaboration and partnerships with innovative startups. Most startups are facing similar customer acquisition or team management issues -- accelerators give you a chance to learn how to overcome early challenges together. And then there’s the capital. Most accelerators give graduates $20,000-$80,000: source: masschallenge.org Around 38% of accelerated startups raise Series A, making accelerated startups almost 50% more likely to raise a seed round than those who didn’t participate in a program. Who are accelerators looking for? If your startup is in a situation where it has a validated MVP and strong founding team but not enough capital to scale and get significant traction, your startup could be a good fit for an accelerator program. An accelerator isn’t likely to take an application seriously that has no proof-of-concept or is being run by a solo founder without a business model. Examples of startups that have been through accelerators include Dropbox, AddThis, and Bench: source: masschallenge.org “Learning by doing is inefficient [...] Part of the power of the accelerator is that it’s a constrained period of time. You’re not trying to incubate your business, you’re trying to accelerate your time. In three months, you’re getting two or three years of learning about your company.” -- Brad Feld, Venture Capitalist Startup Incubators source: masschallenge.org Incubators are more open-ended than accelerators, and aren't usually designed to rapidly boost growth. Instead, incubators nurture and mentor startups over longer periods of time - over a year. While accelerators want to pay close attention to each startup, incubators provide ad-hoc help with legal and business services, as well as help turning a concept into something with product-market fit. Incubators usually provide office space and consultations with experts, but take a more laid-back approach. There’s no intense program here -- just an environment of collaboration and support when needed. Examples of incubators include 500 Startups and Amplify.LA. Is an incubator right for my startup? If your company is not ready to join an accelerator program, an incubator might be the answer. Incubators help startups solve technical and design issues when building the product, learn how to run lean, and build a successful team. Incubators also help startups who don’t have experience operating a venture-backed startup or are up against legal and operational issues related to company structure, etc. Incubators usually don’t require equity or put as much pressure on success as accelerators, but also don’t offer capital. It’s all a trade-off. To summarize: if your company is very early stage and needs help getting past the idea stage, an incubator is the better fit versus an accelerator. Duration of a Startup Incubator Incubators can run anywhere from 6 months to 5 years, which gives teams a lot more time to grapple with the problem their business is solving (albeit usually in a lower-touch environment). Application Process The application process for incubators is not as competitive as accelerators. They often focus on advancing local startups and improving the area’s business ecosystem. This often means including businesses that aren’t showing signs of rapid growth or scalability. Incubators are less rigid with applications than accelerators, so the process is harder to generalize; check the FAQs of incubators in your area for specifics. Investment Capital Incubators don’t traditionally offer capital to startups, instead offering office space, mentorship and partner opportunities. Because no capital is given, incubators don’t ask for a cut of equity. Who are Incubators looking for? Incubators and accelerators both look for promising companies, but incubators are more lenient. A robust MVP and business plan usually isn’t a “must-have”, but a great idea is. The same goes for a company’s growth potential. Since incubators are longer-term arrangements, there’s more room for learning and growth as the program goes on, so incubators are more forgiving towards companies that haven’t achieved product-market fit or got their first 10 customers. ACCELERATOR OR INCUBATOR: HOW DO YOU CHOOSE? The choice depends on two main things: (1) what you’re looking for, and (2) the stage of your company. If you’re a proven startup in need of a cash injection to fuel growth, an accelerator is the best option. Earlier-stage companies, or solo first-time founders, are better off with the guidance of an incubator. To summarize: Written by Robbie Richards - https://masschallenge.org/article/accelerators-vs-incubators
Deconstructing VCs’ Decision Making Frameworks
Most of our daily job as VCs consists of identifying uncertainties and spending time on trying to build a strong enough conviction on what the distribution of outcomes might look like. Why? Because this drives investment decisions. For entrepreneurs, understanding the decision-making process of a VC is perhaps equally complex. Doing so is nonetheless the key to assessing their chances of raising VC money. At Point Nine, we are aware of entrepreneurs’ need for transparency and this is why we’ve published a few posts about our investment thesis, made our internal deal memos public, or even created some (in)famous funding napkins (SaaS and Marketplace). But we are not the only one; most of the experienced investors have also become more vocal about their own investment principles. If you’re curious why, check out this post I wrote some time ago. The simple exercise I run in this post consists in combining a few frameworks I’ve learned either doing the job at Point Nine, at Alven, or reading posts from some of the most famous VC firms online. After reading ten(s) of posts about VCs’ investments principles, I ended up with a simple framework with 5 categories (or 5 Ts) outlining how VCs think about: The Team The Tech (a.k.a. Product) The Total Addressable Market (a.k.a. Market) The Traction (a.k.a. Growth) The Trenches (a.k.a. Defensibility) — thanks to all of you who gave me a synonym of moats! The idea of exposing this framework is two-fold. First, by scoring investment opportunities according to these 5 criteria, I might be able to arrive at a ‘more rational’ investment decision myself. Second, I might be able to help entrepreneurs better assess their chances to raise VC money. At a high level, this framework seems to be consistent with the traditional mental process that we go through as VCs before making an investment decision. Click to try the calculator! I also created a TL;DR version of this post, which is a Typeform calculator. If you have no time to read this post, but still want to assess your chances to raise VC money, just click the image on the left. That being said, most of the answers and the formula behind the calculator are mentioned below, so if you want to score highly, it’s probably best to skim through this post briefly! The scoring system is entirely arbitrary but it might make the experience of reading this post more enjoyable. T #1 — Team 1. “There is always a secret at the core of every business” The best startup teams own a secret. If you look at the startup ecosystem as an efficient capital market — I know it’s not completely — “there is no free lunch”. Hence, opportunities that are too obvious will likely be too competitive or already optimally priced by the VC market. We believe that founders who have first-hand experience of the problem they’re trying to solve approach this problem with an information advantage over the market. VC Compatibility Calculator: Add +1 if you think that you have an information advantage versus the market due to unique market insights, better access to technology/data or stakeholders in your industry. 2. Purpose Building a startup is hard. Founders with a purpose are resilient and will find other reasons than financial ones to survive the difficult days. I could not find a better way to put it than Homebrew in their investment thesis: “We believe that being mission-driven is a competitive advantage for an entrepreneur. Mission-driven founders are better recruiters — they can explain the “why” and not just the “what” and “how” of their vision. Their convictions make them better leaders, and their employees more loyal, through the ups and downs of startup life. Their passion adds energy to every room and every team.” VC Compatibility Calculator: Add +1 if you’re on a mission to bring a specific idea to the market. 3. Leaders + Managers + Doers Now, if we dive deeper into the characteristics of successful founding teams, I would agree with Jean de La Rochebrochard at Kima Ventures when he writes that “a company needs honest Leaders, Managers, and Doers”. Having a strong leader is all the more necessary in that it helps startups to hire, sell and fundraise. VC Compatibility Calculator: Add +1 if there is one strong leader, another +1 if there is one manager, and another +1 if there is Doer. 4. Decision Making Startup founders need to be able to listen to feedback from employees, customers and their board. Nonetheless, this feedback can sometimes be misleading and contradictory. Hence, founders also need to say “no” and have good decision making skills — Tom Tunguz’s post on that is great. A wise man I recently met summarizes this decision making ability in having “a f*ck you attitude”. Yes, saying “no” to your employees, “no” to your customers, “no” to your investors can sometimes be the right way to go! VC Compatibility Calculator: Add +1 if you believe there is someone in the founding team with good decision making skills. 5. Learning curves “One must learn to assess the learning curve of young founders as a primary reason to decide whether or not to invest into them.” Across the startup journey, founders will make mistakes. The best of them can spot mistakes, reflect upon them, and become better. As long-term investors, we put more emphasis on understanding the trajectory that founders are on than on the discrete point they find themselves in at the point of the investment. VC Compatibility Calculator: Add +1 if you work in fast iteration cycles and can integrate feedback quickly. Total T#1 = Secret, Mission, Leader + Managers + Doers, Decision Making, Learning Curves / 7 Now, that you have the right team and scored highly on the team assessment part, let’s try to understand if you are building the right product. T#2 — Tech (aka Product) 1. Product Picker This part is a good transition between team and product. If you don’t know what a product picker is, I would really recommend giving Michael Wolfe’s post: “The most important job in Technology” a good read. Said briefly, a product picker is someone with great product instincts, someone who understands the needs of the users and the overall vision of the company to make the right product choices in a timely manner. Having such a person early on in a startup team is an invaluable strength and we can often see that looking at the product velocity of a startup. VC Compatibility Calculator: Add +1 if there is one great product picker in your team. 2. 10x better AND cheaper Marketplaces like Uber and AirBnB, as well as SaaS products like Salesforce won in their respective markets because they could offer a product with a much better user experience than their competitors whilst leveraging technology to have a much better cost structure as a company enabling them to offer better prices. Uber did not create private drivers, they just made it available “as tap water”, and at a competitive price because they leveraged technology. 10x Better AND cheaper. As Benchmark’s Sarah Tavel explains well, the devil is in the AND. I’ll try not to say more, because you should really read her post! VC Compatibility Calculator: Add +3 if your product is 10x better AND cheaper. Why+3? This is VERY rare but when this happens, this is a very powerful driver of growth and defensibility. 3. Fast product iterations Just like with teams, in the early days what matters when it comes to technology is the trajectory, not the current status of the company. Hence, i) knowing how to prioritise between product features, ii) releasing often, iii) being able to integrate user feedback fast and iv) working on weekly product sprints is a great advantage in the early days. Yes, that’s a long list of things to get right! VC Compatibility Calculator: Add +1 if you work on weekly sprint iterations and consider that you can test product hypotheses quickly. 4. How critical is your product for your (future) customers? Last but not least, building a 10x better and cheaper product matters only if it is critical for the customers. VC Compatibility Calculator: Add +1 if your product is a must have (vs. a nice to have) for your customers. Total T#2 = Product Picker, 10x Better AND Cheaper, Speed of Product Iteration, Criticality of your Product / 6 Ok, well done, now you have the right team and the right product. Let’s see if you’re going after the right market! T#3 — TAM (aka Market) 1. Large markets Union Square Venture’s investment thesis fits in 140 characters: USV “invests in large networks of engaged users, differentiated by user experience, and defensible th(r)ough network effects” But what does “large” mean? Most VCs would agree that bottom-up wins over top-down market sizing. For SaaS, Christoph summarizes what we look for as follows: “We’re looking for markets that consist of at least 3,000 whales ($1M ACV), 30,000 elephants ($100k ACV), 300,000 deer ($10k ACV) or 3M rabbits ($1k ACV)”. WTF are these animals? (See image above). How does it work with marketplace businesses? Just exchange ACV by (AOV X take rate) and the # of animals by (Transaction frequency/user X # of users). Bottom line, VCs look for multi-billion dollar markets. That said, the more industry specific or vertical (vs. horizontal) a startup is, the more likely it is that a company can own a significant market share (>15%) because of a lower expected competitive intensity. As a consequence, VCs’ expectations regarding market sizes are lower for industry specific solutions — think $1bn markets for vertical solution vs. multi billion dollar markets for horizontal ones. If you’re a SaaS company there is a high likelihood that you’ll need to hunt animals in the US (aka you need to win the US market). Why? Because more than half of the current software spending per year comes from the US. VC Compatibility Calculator: Add +1 if your bottom up TAM is above a billion for vertical startups, in billions for horizontal ones, and add another +1 if you have a chance to win the US market. 2. Feature/product/real company (aka how high is the ceiling?) The reality is that market sizing is always a complex exercise. Why? Because “Innovative tech companies typically disrupt an existing market by undercutting the incumbents on the one hand (and hence shrinking the market), while creating a new use case attracting a larger number of new users on the other hand”. Hence, being a little creative around market shrinkage and long term market expansion is especially important. An interesting way to look at the potential for market expansion is then to think about a startup as either a feature (stalling at 1M ARR) / a product (10M ARR) / real company (100M ARR) — see Nico’s post for more here. VC Compatibility Calculator: Add +1 if you have enough crazy ideas on your product roadmap to build a “real company”. I know this question might be VERY difficult to answer in the early days of a startup. One way to look at it is to think about the current product features of Salesforce and ask yourself if there is enough demand/space in your market to develop such a complete product in 10 years! 3. Optionality / Macro trend Now that your market seems big enough on paper, how do you get to the billion dollar market capitalisation? There needs to be something like a macro trend that transforms a great company into a truly exceptional company. When you think about Zendesk, beyond a great product, beyond the founders’ execution capabilities, couldn’t we argue that the shift towards a more “customer centric” world has also increased the market appetite for helpdesks and thus made the company even more successful? VC Compatibility Calculator: Add +1 if you can already foresee that you could ride a macro trend which might push your growth once you’ve reached a certain size. Total T#3 = $ Bn Market + US, Real Company, Optionality / 4 Ok, well done, the market is big enough. Let’s now wonder about how your startup will grow and gain market share. Because, as Nakul Mandan from Lightspeed writes in his own investment thesis, “Ultimately, startups are valued for growth”. Hence, we try to understand what could drive a company to grow from 0 to 1M, from 1 to 10M, and from 1 to 100M and how much cash each of these steps would require. T#4 — Traction (aka Growth) 1. Market timing: “Is your market in pull or push mode?” It’s always easier to sell if markets are in “pull mode”, ie. when your next clients are already looking for a solution like yours. In “push mode” you will need to convince them that your solution fits a need that they don’t know about. VC Compatibility Calculator: Add +1 if your market is in “pull” mode 2. Distribution advantage Keeping customer acquisition costs low at scale is often very difficult. Why? Because startups need to convince later stage users that are less keen to buy or who are more difficult to find on online channels, and/or because competition will likely push down margins. This explains why “the largest outcomes tend to have one common feature: something in their core product allows them to grow faster over time, while bringing acquisition costs lower”. Digging deeper, we can outline three ways to overcome distribution challenges: The product becomes better with time because the product has intrinsic network effects. It can be either a network of people for a marketplace or a network of data for AI products (see USV Andy Weissman’s post here). Startups can keep on acquiring later stage users because they “provide a better experience to customer ‘n+1000’ than they did to customer ‘n’ directly as a function of adding 1000 more participants to the market” — it’s not my definition, it’s Bill Gurley’s here ;) The product is intrinsically viral: the more users there are, the more people are exposed to the product (eg. Typeform, Venmo). Or channel partners become multiplicators after a startup has reached a certain scale. Tom Tunguz published an interesting post about that earlier this year. Xero and Bench are interesting examples that fit this category. VC Compatibility Calculator: Add +1 per source of distribution advantage. 3. Avoid the graveyard of low LTV and high CAC Last but not least, growth costs money and beyond VC money, the only way to finance it will be to maintain healthy unit economics at scale. In SaaS and marketplaces, this means aiming at a good enough CAC/LTV ratio to avoid what Christoph calls “the graveyard of high CAC vs low LTV”. If you have little chances to benefit from the distribution advantages mentioned above, you can still get extra points if you can charge 100k-1M ACV because you’ll be able to spend big money on sales and marketing. What matters here is not the unit economics at the Seed stage but much more what these could look like post Series A. VC Compatibility Calculator: Add +2 if you have an idea on how you’ll avoid the graveyard! You can be creative :) Why +2? Because it’s almost the most important question. Total = Pull/Push + Network Effect + Virality + Potential for channel partners + Healthy Unit Economics at scale = /6 Ok, now you have a great team, you’ve built a great product, your market is large and looks for a solution like yours. All in all, you have a great business, but what will prevent greedy incumbents or new players from attacking your rent? Moats or Trenches. This is why any investor will try to understand the types of trenches a startup could be building with time. T#5—Trenches (aka Defensibility) Sources of defensibility are not mutually exclusive and each of them is questionable per se (see this 2011’s post: “How strong are network effects online, REALLY?” or my most recent post “Routes to defensibility for your AI startup”). But here is a non-exhaustive list of sources of defensibility: 1. Network effects AirBnB is defensible today because they have the largest inventory of private housing and the largest amount of demand for private housing. They have won consumer trust, built strong user habits and own the supply side by driving consistently high volumes of paying leads. 2. Data network effects ML products become better as they ingest more data. If you own the data that is required to train a ML-powered product, and nobody else does, chances are high that greedy incumbents won’t be able to build a product as great as yours. 3. Superior technology / protected IP Another way to prevent competition is to have a unique technology that is just very difficult to copy, which could be patented or not. Patents for new drugs in the pharma industries are a good example of protected IP. 4. User or Data lock in This is more questionable, but switching costs increase with the amount of data that is stored and locked within a product. If you have all your contacts or deals in Salesforce, and can’t export it, you’ll likely think twice before switching CRM. The defensibility of a product is also correlated with the number of users on the platform. If your entire company has been using and collaborating on Zendesk for a few years, it might not be that easy to change your ticketing software. 5. Brand or Mindshare This one might be as controversial as this is intangible. Nonetheless, we could argue that once companies become top of my mind for their customers, they’re simply not looking for alternatives — remember the last time you used Bing for search? 6. Economies of scale Last is Economies of Scale (which is different than network effect). Once startups get bigger, they lower their break-even points, increase their bargaining power to increase prices, decrease costs, and protect themselves from new envious startups willing to enter the space. Did you ever think about starting a book marketplace? VC Compatibility Calculator: Add +1 per source of defensibility Total = Network effect, Data Network Effect, Superior Technology, User or Data lock-in, Brand, Economies of Scale = /7 Total Team = /7 Tech = /6 TAM = /4 Traction = /6 Trenches = /7 Total = /30 Congrats for finishing the post! Time to test it on your own company? The last extra point I would like to mention to finish this post is a quote from Fred Wilson: As a VC, “You have to figure out how to insert yourself into that journey in a way that is constructive and value adding. And you have to do that work before you invest because if you can’t figure out how to play a role that is constructive and value adding, you should not make that investment and join that Board.” I would probably add +1 here as well, but this is not a question for founders ;) I hope this post brings a little more transparency into the decision making process that we go through as VCs. Written by Point 9 & Published on Medium
Use the Enterprise Investment Scheme (EIS) to raise money for your company
In case you are wondering what the Enterprise Investment Scheme (EIS) is, it is a means of getting funding if you are a growing startup. This scheme is aimed at growing companies, if you are looking for your first funding round then you will need to look at our other post on the SEIS scheme. Below is the government outline on how the EIS scheme works and your eligibility as a startup to apply. Use the Enterprise Investment Scheme (EIS) to raise money for your company The Enterprise Investment Scheme (EIS) is one of 4 venture capital schemes - check which is appropriate for you. How the scheme works EIS is designed so that your company can raise money to help grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company. Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This also includes amounts received from other venture capital schemes. Your company must receive investment under a venture capital scheme within 7 years of its first commercial sale. You must follow the scheme rules so that your investors can claim and keep EIS tax reliefs relating to their shares. Tax reliefs will be withheld or withdrawn from your investors if you do not follow the rules for at least 3 years after the investment is made. There are different rules for knowledge-intensive companies that carry out a significant amount of research, development or innovation, and either: want to raise more than £12 million in the company’s lifetime did not receive investment under a venture capital scheme within 7 years of their first commercial sale Approved EIS funds The rules for EIS approved funds will be changing on 6 April 2020 to take account of the: changes that will focus approved funds on knowledge-intensive investments increased flexibility available to fund managers in the timing of investments Read the draft guidelines to find out more about the amendment to the requirements for an EIS approved fund. What money raised can be used for The money raised by the new share issue must be used for a qualifying business activity, which is either: a qualifying trade preparing to carry out a qualifying trade (which must start within 2 years of the investment) research and development that’s expected to lead to a qualifying trade The money raised by the new share issue must: be spent within 2 years of the investment, or if later, the date you started trading not be used to buy all or part of another business pose a risk of loss to capital for the investor be used to grow or develop your business Companies that can use the scheme Your company can use the scheme if it: has a permanent establishment in the UK is not trading on a recognised stock exchange at the time of the share issue and does not plan to do so does not control another company other than qualifying subsidiaries is not controlled by another company, or does not have more than 50% of its shares owned by another company does not expect to close after completing a project or series of projects Your company and any qualifying subsidiaries must: not have gross assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterwards have less than 250 full-time equivalent employees at the time the shares are issued Your company must carry out a qualifying trade. If you’re part of a group, the majority of the group’s activities must be qualifying trades. Limits on money raised Your company cannot raise more than £5 million in total in any 12-month period from: Your company cannot raise more than £12 million from these sources in your company’s lifetime. This includes any money received by any subsidiaries, former subsidiaries or businesses you’ve acquired. Limits on the age of your company You can receive investment under EIS as long as it’s within 7 years of your company’s first commercial sale. If you have any subsidiaries (including former subsidiaries) or businesses you’ve acquired, the date of your first commercial sale is the earliest of the group. If you received investment in this period (under EIS, SEIS, SITR, VCT or state aid approved under the risk finance guidelines), you can use EIS to raise money for the same activity as long as you showed you were planning to do so in your original business plan. If you did not receive investment within the first 7 years, or now want to raise money for a different activity from a previous investment, you’ll have to show that the money: is required to enter a completely new product market or a new geographic market you’re seeking is at least 50% of your company’s average annual turnover for the last 5 years If your company owns or controls any other companies they need to be ‘qualifying subsidiaries’. This means: your company must own more than 50% of the subsidiary’s shares no one other than your company or one of its other qualifying subsidiaries can control this subsidiary there cannot be any arrangements which would put someone else in control of this subsidiary The subsidiary must be at least 90% owned by your company where either the: business activity you’re going to spend the investment on is to be carried out by the qualifying subsidiary subsidiary’s business is mainly property or land management The subsidiary can be set up to complete a project or series of projects before closing, as long as it supports the growth and development of your company. Risk to capital condition The investment in your company must meet the risk to capital condition, which means: your company must use the money for growth and development the investment should be a risk to the investors capital Growth and development means you’ll use the investment to grow things like your revenue, customer base and number of employees. The growth and development of your company should be permanent and not rely on the investor’s continued support. The investment should carry a risk that the investor will lose more capital than they are likely to gain as a net return. HMRC will not consider the maximum return an investor could get if your company is successful, because this cannot be guaranteed. The net return includes: income from dividends, interest payments and other fees capital growth upfront tax relief When deciding if you meet the risk to capital condition, HMRC will look at things like your company’s: sources of income assets structure use of subcontractors marketing of the investment opportunity relationship with other companies You will not meet the risk to capital condition if there are risk reducing arrangements in place that result in an investor: getting priority over other investors being able to withdraw their money as soon as possible protecting their money so that other investors money is used first The shares you issue must be paid up in full, in cash, when they’re issued. Your company should have a way to accept payment before shares are issued. Your shares for EIS investments must be full risk ordinary shares which: are not redeemable carry no special rights to your assets The shares you issue can have limited preferential rights to dividends. However, the rights to receive dividends cannot be allowed to accumulate or allow the dividend to be varied. When you issue the shares there cannot be an arrangement: to guarantee the investment or protect the investor from risk to sell the shares at the end of, or during the investment period to structure your activities to let an investor benefit in a way that’s not intended by the scheme for a reciprocal agreement where you invest back in an investor’s company to also gain tax relief to raise money for the purpose of tax avoidance - the investment must be for a genuine commercial reason Before raising your money Your investors will only be able to claim tax relief if you meet the conditions for EIS. You can ask HMRC if your share issue is likely to qualify before you go ahead, this is called advance assurance. How to apply If you’ve got advance assurance, provide copies of any documents that have changed since HMRC gave you advance assurance. If you’ve not got advance assurance, you must provide the following information for your company and any subsidiaries: the business plan and financial forecasts a copy of the latest accounts an explanation of how you meet the risk to capital condition details of all trading and activities to be carries out, and how much you expect to spend on each activity an up to date copy of the memorandum and articles of association the information memorandum, prospectus or other document used to explain the fundraising proposal to your investors details of any other agreements between your company and the shareholder a list of the amounts, dates and venture capital schemes under which you’ve previously received investment any other documents to show you meet the qualifying conditions You’ll also need to show evidence that you’re a knowledge intensive company if you’re applying as one. You can only submit your compliance statement when you’ve carried out your qualifying business activity for 4 months. You must submit it within 2 years of this date, or within 2 years of the end of the tax year in which the shares were issued (whichever is later). You must complete a separate application for each share issue. Send your application You can email or post your compliance statement and supporting documents. Email: email@example.com. Post: Venture Capital Reliefs Team WMBC HM Revenue and Customs BX9 1BN What happens next If your application is successful, HMRC will send you a letter and compliance certificates (form EIS3) to give to your investors. The letter will include a unique investment reference number. You must include this on the compliance certificates you give to investors. Investors need the compliance certificate and reference number to be able to claim tax relief. You must follow the scheme rules for at least 3 years after the investment is made - otherwise tax relief will be withdrawn from your investors. You must tell HMRC if you no longer meet the conditions within 60 days. Where HMRC decides the investments do not meet EIS requirements, we’ll write to you explaining why. If you disagree, you can ask HMRC to review the decision, or appeal against it.
Venture is not the only option
Venture Capital is glamorized and celebrated as the best route for every company, but it isn’t the right funding option for many businesses. It should be no less aspirational or exciting to self-fund businesses, take on debt, or grow non-profits. Fantastic businesses have been built and scaled without venture capital, for example: Mailchimp which bootstrapped (or self-funded) their growth, or Skyscanner, which ran for six years before raising Venture Capital. Khan Academy, the education technology company providing educational tools and resources to millions of children, which is a non-profit. Cards Against Humanity which raised their initial $15k of funding through Kickstarter and built the company from there. It is frustrating that raising Venture Capital funding is seen as an important milestone or the mark of a ‘good’ business. It is a tool like any other and it should be presented as such, with the pros and cons clearly signposted. It’s also troubling that many funding options aren’t available to all founders, for example, the idea of ‘friends and family money’ which is completely unrealistic for many people. At Ada Ventures we believe that we need to do more as an industry to be transparent about when venture capital is not right for a business. As Josh Koppleman puts it: “Big problems have occurred when you have founders who have unwillingly or unknowingly signed on for an outcome they didn’t know they were signing on for […] I sell jet fuel […] and some people don’t want to build a jet.” — Josh Koppleman, investor at First Round Capital as quoted by Erin Griffiths in the New York Times. This guide should be read before starting your company and should help think through: The right company structure The right funding route Some questions to answer before deciding to take venture capital Space X’s Falcon Heavy lifting off. VC investment is like rocket fuel but isn’t right for every business. Decide on the right company structure Before starting a company and way before considering venture capital funding, think about what the right company structure is for you and your definition of success. What is the principal mission of what you’re building? Are you interested in maximising value for shareholders, which is the primary purpose of a company? Or are you interested in having maximum impact on the biggest possible number of people, which might be a better fit for a non-profit? Are you trying to change policy? Or create a product that will be bought by millions of people? This will help determine what company structure is best for you. For-profit Limited company Limited company with B-Corp status Limited Liability Partnership (LLP) Social Enterprise (you operate as a company (not a charity), but you focus on maximizing social impact as well as financial profits) Community Interest Company (CIC) Company limited by guarantee (eg. Diversity VC) — enables you to set up subsidiaries which might make a profit in the future Charity Entity with protected tax status, restricted from making or distributing profits. The core purpose is likely to be to help and raise money for others When you have decided on the right company structure for you, consider the options available to you for funding your company. Decide on the right type of funding for your business Every funding option has advantages and disadvantages, and some are better suited to certain types of businesses and business models. It is important to explore the funding options available before deciding how to build your company as the route you take will have knock-on consequences. The founder of RXBar, which was funded with $10,000 of the founder's savings and sold to Kellogs for $600m. Bootstrap Bootstrapping is a term for growing without taking on external capital. Founders can self-fund through selling products or services to customers which they can then use the proceeds to fund the development costs of their tech and team. This requires a highly disciplined approach to cash-flow management. Best for Businesses that generate very early cashflow without much tech infrastructure (agencies, recruitment, consultancy). Advantages Owning 100% of your company. Disadvantages Difficult to start a company without savings. Slow growth. Bootstrap + Debt As above but consider taking on debt to finance growth, which could be done through invoice discounting, venture debt, loans. However debt is not widely available until your company has something to borrow against — (usually tangible) assets, or (predictable) cash flows — typically receivables or profits! Grants are also possible for businesses. Check out Innovate UK to see if you’re eligible for R&D grants which could bridge you to the metrics you need to take on debt (predictable cashflow). Best for Businesses that generate very early cashflow without much tech infrastructure (agencies, recruitment, consultancy) but still want to grow and can raise debt. Advantages Owning 100% of your company but also having the additional working capital to invest in growth. Disadvantages You have to achieve a certain size or maturity to take on debt Revenue Share Taking investment, but instead of taking equity, the investor is paid back by a revenue share agreement. This is often capped at 3–5x the initial investment, and only kicks in after 1–2 years of putting the capital to use. Models can include a conversion mechanism into actual equity, if down the line that becomes an appropriate model. Model made famous by Bryce Roberts at Indie.vc but is not yet mainstream in the UK or Europe (AFAIK — please let me know if I’m missing a fund that does this)! Best for Owning 100% of your company but also having the additional working capital to invest in growth, without the risks associated with taking on debt. Advantages Owning 100% of your company Having access to working capital to grow Maintains the option for VC-like funding if that later becomes more appropriate. Disadvantages Limited universe of investors. Typically requires higher margins to ensure the paybacks are palatable. Angel investment Early-stage investors who typically invest anything from £10k-£1m. Raising money from angel investors is quite different from raising money from venture capitalists. Some companies raise angel money first before raising VC, some companies find that angel investors are a better fit for them overall than venture capitalists. An overview of how to find angels is here. Best for A light touch personal relationship and operational value add. Advantages Not being encouraged to grow at the expense of everything else. You know what you are getting in terms of a board member (they are unlikely to leave / swap board seats with someone else). Can be faster to close on investors investing their own money, compared with a fund with longer processes Disadvantages Very dependent on the kind of angel you have Can require a lead investor to close larger angel rounds Crowdfunding Crowdfunding sites allow you to aggregate many small ‘retail’ investors together. Typically they require you to create a video pitch and be prepared to answer questions from investors while you’re the business is ‘live’. Check out Crowdcube, Seeders and Syndicate Room which are the three major UK sites. Best for Consumer businesses which can be easily understood that want to give their customers access to their company as an investment opportunity. Advantages Can generate good marketing as well as investment. It is the most democratic form of investment as people can invest as little as £10. Disadvantages Works best when companies have raised 50–75% of the round off the platform and they are using crowdfunding to finish off the round. Doesn’t work so well for B2B or complex businesses. Accelerators Accelerators or incubators fund companies that are pre-product. Typically the deal is a home for [two months], combined with mentorship and guidance, wrapped up in a demo day event at the end; in return for which you’ll give away 5% or more, which may or may not be paid-for equity (i.e. come with cash). Best for Real hands-on, operational advice on building a product and in some cases, building a team. Advantages Safe space to figure out if you want to do an idea Some great accelerators are equity-free and still provide real benefits and a badge of approval — e.g. FirstGrowth in the US. Disadvantages Can be expensive in terms of equity % and there are widely varying levels of value add. There are purported to be over 500 accelerators/ incubators in the UK alone — be sure to reference past cohort companies to determine if the value offered is worth it. Venture Capital Venture Capital is typically for businesses after they have built a product and usually once they have some early customer traction. Venture Capital is usually equity investment of anything from £100k to £100m, for between 10–30% of a business, but typically 15–25% at each round, with rounds increasing in size as the businesses get more mature. Venture capitalists will invest in ~30 companies per fund, on the expectation that 1/3rd will fail, 1/3rd will do ok and 1/3 will hit a ‘home run’ (sell or IPO for at least 5–10x their original investment). Venture Capital is glamorized in TechCrunch and other tech media, but has real disadvantages for businesses that are worth knowing about before making a decision to take on this type of funding. Best for Businesses that can grow and scale very fast. Businesses addressing a large problem, or a niche problem adjacent to a large market. High margin businesses (eg software), or where there are network effects as they scale (i.e acquisition of new customers gets easier as the company grows and the COGS are non-linear to each incremental user). Businesses with ‘winner take all’ dynamics like some marketplaces where rapid scale is crucial to success. Advantages Capital comes with operational support and a strong network (depending on the fund that you work for). You will be part of a ‘portfolio’ of other companies you can learn from. Disadvantages Can be expensive in terms of equity % and not all VCs provide value beyond capital. Reference them before you take the money. Once you’ve taken venture capital it is difficult to ‘go back’ to a bootstrapped business and you might need to continually raise money It is difficult to buy-out your VC investors, in fact, the average founder / VC relationship lasts longer than the typical marriage. You will be pushed to scale and ultimately exit the business at some stage so that VCs can return capital to their investors. Questions to ask yourself before raising venture capital money: (These are non-judgemental questions, but are a guide to how VCs may assess your business) Is there a realistic possibility that you could sell your company, or take it public through IPO for at least £100m; and for bigger funds £1bn? Are you building a business in a big enough or high growth enough market to do that? Are you aiming to grow 2–3x y-o-y? Is your business model capable of potentially delivering this? Are you open to putting in place a formal board? Are you prepared to report to your investors on a monthly basis and hold board meetings monthly or every other month? Are you prepared to have a venture capitalist sit on your board? Are you aware of what negative control provisions (consent matters) are and the restrictions that would put on you (for example not taking on debt, not hiring someone above a certain pay grade)? Are you prepared to have your existing shares reallocated by a vesting schedule, and for 75% them to re-vest following the first ‘round’ of capital you take on? Are you prepared to keep raising money throughout the journey of growing this business? Have you modeled out the dilution to your shareholding that raising multiple funding rounds would involve? Have you looked at any IPO filings of public companies to see how much the founders own on an exit? Are you aware that you could be fired as the CEO/ founding team? Are you aware of the terms ‘good leaver’ and ‘bad leaver’ and what they mean for your shareholdings if you were to leave the business? These is a non-exhaustive list but hopefully helps as you start thinking about whether Venture Capital funding is really what you want. Written by: Check warner - Ada Ventures - Published on Medium
What is Lead Generation and how is it done?
What is lead generation? A lead is a person or company who is interested in your products and services. Lead generation is the process of attracting the interest of these people who may then later go on and purchase from you. However, not everyone is a "lead" which is why the process of lead generation requires targeting particular leads ie people who intend actually purchase from you in the future. Lead acquisition is one of the most important goals of any business. Large companies have teams of people dedicated to achieving this and ultimately sales. With so many social media tools flooding the market, there are many opportunities to target the right people (high quality leads) for your particular business and industry. A few of the top lead generation strategies include: Creating unique relevant content & blogs Email marketing Social media marketing Networking Live events and seminars Well designed landing pages on websites Coupons & Discounts What are the benefits of lead generation? Lead generation is a very natural part of the sales cycle, people are made aware of your product or services and can then decide if it solves their problem or fulfils their needs which is very different to feeling like they are being pushed into something they do not want to purchase. The benefit of lead generation is that the right people are attracted to your products and services and they decide to make the purchase when they are ready. other benefits include: Improved ROI - By targeting the right companies in the first place, less time and money is wasted on people who are unlikely to purchase. Building brand awareness - A lot of the techniques used in lead generation go hand in hand with promoting your brand and thereby increasing brand awareness. Understanding your customers better - Through the process of collecting leads via registration forms and understanding your customers preferences and hobbies, you are able to add better value to your products and services and therefore target them even better. Why focus on lead quality? Sales teams often focus on lead quality as they understand that the higher the quality the more likely the lead is to purchase, the better the return on investment, the higher the customer satisfaction. How do you attract quality leads? There are several social media platforms that are commonly used to attract leads. For example: LinkedIn — especially good for B2B Twitter — good for both B2B & B2C Facebook — good for both B2B & B2C By matching the right platform for your industry/product/service you can utilise social media platforms like the above and use them to attract high quality leads as the people on these platforms have very particular interests and networks that you can tap in to. Post free downloadable articles and ebooks on your website A free downloadable resource is a great way of capturing details of a potential high quality lead especially if the information you provide is relevant to them. You can further enhance the information you collect on the lead by setting up a few questions on the form which can inform you on where they are in the purchasing journey. For example, you may ask, are you "just exploring", "have narrowed down options" or " ready to make a move". All 3 of these states tell you where the lead is in their purchasing journey and what kind of follow up is required. Offer incentives for referrals Referrals are great for generating high quality leads, especially if someone has had a positive experience with your brand. You could always incentivise the referral process by offering discounts and coupons for every referral you receive. Affiliate partnerships There are many affiliate marketing platforms out there that can be used to promote your product though bloggers and content creators who advertise your product or service for you. They are incentivised by a commission for every sale they make for you. Influencers Influencers are people who have a large network of followers on social media platforms. These influencers usually have very loyal followers who purchase products and services they recommend. By reaching out to influencers to promote your product you can end up with very good quality leads that they pass to your website. Managing your leads Once you have leads, it is important to qualify them based on their quality you can do this by tracking them on a spreadsheet or other software and then rank them based on their actions. For example, you can rank or score the leads based on their interaction and behavior. You could assign scores for visiting your site, opening your emails, clicking on a particular ad, downloading a resource, becoming a member or starting a free trial. The higher the score, the faster you can reach out to them meanwhile nurturing the lower scored leads in a more relaxed way. this allows you to prioritise and focus your time and efforts. Conclusion Ultimately, even a quality lead can be lost if you do not nurture them by building a relationship with them this is just as important as capturing the lead in the first place. After all, they are your future customers.
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