Learning from a failed contech funding round during a funding downturn, in the Netherlands (Q1/Q2 2023)
Preparing for a good process
- Create an (airtable) database with investors with matching investment theses. I categorised these into A (strong fit, exact thesis match), B (fit, significant overlap in thesis) and C (partial fit).
- Invest in the deck: concise, visually appealing. Monitor opens through DocSend: finetune pages that garner attention, and remove pages that are consistently skipped / are filler.
- Find a reputable lawyer that knows how to structure and negotiate startup investments. We had the luck of encountering an excellent and experienced lawyer that also said to work on a no-deal-no-pay basis.
- The initial reach-out email is extremely important: be relevant, concise, and tailor each reach-out to the reader. My best performing reach-out message was structured like this:
<introduce yourself in one line>. I’m approaching you because I see a strong match with
<fund name>‘s investment philosophy:
<investment thesis summary in one line> and previous investments
<investment A> and
<investment B>. I think
<company name> might be interesting for you.
<One line pitch: what you do - how you do it - how you are unique>
< Max 5 brief bullet points that illustrate your potential & traction, skew towards irrefutable figures >
We are seeking investment to
<operational purpose of investment>.
Could this be interesting for you and your firm? I’d love to discuss our approach and plan with you. Would you be interested in a brief call?
Thank you for your time,
<your name and company name>
- Track your interactions: who did you reach-out/talk to on which date, what was discussed, when is the next action. My airtable reminded me when I needed to follow-up.
- Track opens (I used mixmax) and be consistent in your follow-ups. We saw most replies after 2/3 emails. Be respectful of the investors’ time, so keep the follow-ups brief, possibly mention extra points that might trigger interest.
- Cold emails are fine. Not great, but fine.
Specifics to our process
This was a full-time process, planned to be one quarter, eventually turning into 8 months. It requires a lot of time, and as an experienced founder told me during the first weeks of the process “fundraising is either very easy or very hard”. It is hard to combine fundraising with engineering responsibilities.
I started with “C” matches to finetune the messaging and practise the pitching. As I was new to the venture capital world, I opted for cold-emailing.
We received a lot of interaction; many opens, subsequent opens, replies, calls.
Investors penetrated the plan incredibly fast. We received replies with varied feedback, processed the comments and adjusted the deck accordingly.
Over a few months the proces boiled down to 3 interested investors, one a group of local angels, then an American seed fund which did small bets, then a local relatively new but wealthy company (I’ll refer to them as party III).
This party was a strategic investor. They were a real estate developer with, these are their own words, a huge repertoire of new developments and a large holding of real estate. Due diligence on our part confirmed they did have capital to invest. During the process of edging towards terms, a number of red flags appeared:
- A new fund. Their previous investments were in real estate and established companies, not early-stage startups.
- They “required” unique access to the deal: no other investors to be involved in parallel.
- They mentioned “no need to discuss with lawyer, that only costs more money”
- They were slow in their replies, meetings were spaced one month apart, even though we made very clear that we were running out of runway.
- However, they kept asking for more meetings, and after 4 meetings made a verbal commitment, that would simply be a matter of “formalising on paper”. We saw more meetings as a good thing as we held on to the heuristic among founders that the goal of an investor meeting is to get invited to the next meeting.
- We waited a month for the terms. We had definitely run out of runway, and we communicated that we expected the terms by date X. On date X + 3 days we received terms which were completely different than the verbal terms we had discussed before. Upon discussion, it became clear that they were most likely looking for a cheap way to acquire our intellectual property. We learned we had just wasted 4 months of our own time, and wasted significant money financing the payroll of our team during those months to make the deal possible.
- Red flags during a process do not magically dissipate when coming closer to the actual terms. In our case, these were all in bad faith, and uniquely served to improve their position and worsen ours.
- It would have been better to have “ran by” the status of the fundraising with experienced entrepreneurs in our network. I think this would have busted the “fantasy” me and my co-founder were maintaining in our heads about the possibility of the deal.
- There is a lot of online advise about dealing with the fundraising process and with investors. However, there is so much that it is impossible to know which advices to take to heart and which not. The map is not the terrain, and finally the antidote for following the wrong markers on the map is personal experience, or less ideal but acceptable: second hand experience but applied to your specific case (e.g: discussion with experienced and trusted advisors).
- It is quite impossible to hide intentions in a term-sheet. As read in numerous advices: term sheets are the goal during this process. Words have no value without term sheets. A interested investor has incentive to provide a term sheet faster than others.
- Do not go into debt to finance a “possible deal”.
- Set a hard deadline and do not make excuses when it gets tight. Accepting a failure will always be a tough decision and stretching the process is not going to provide relief.