The Spanish startup ecosystem keeps growing but there’s still a lot of questions among founders regarding investment and fundraising. Every entrepreneur should know how to choose the most appropriate funding for their startup, and how and when to approach investors/funds.
Together with Lánzame Capital, Itnig opened a round table to discuss the role of investors with Jordi Altimira, CEO of Lánzame Capital and UpBizor; Jordi Vidal from Kibo Ventures; Helena Torras, investor and entrepreneur; and Àlex Rodríguez, Business Angel and CEO of MarsBased.
What should entrepreneurs know about Venture Capital when looking for funding?
Jordi Vidal
One of the most important things you have to understand when you are an entrepreneur is whether Venture Capital is really a good partner for you. That has a lot to do with the expectations you have about your business, the level of growth, the type of team you want to sign, etc.
Venture capital is a very specific type of financing that requires very rapid growth, companies that can offer a rapid and above all very high return to investors. Startups have very high mortality and the funds know that. Therefore, they have to bet on projects that can exceed that mortality and know that if 90 percent of these startups die, then the other 10 percent have to get back the money you have lost with those 90 percent of the companies.
It is a super important point, to be very clear if the fund, if the VC, really is the partner that the entrepreneur wants for the moment of the company.
Helena Torras
When you have an idea, and you are going to start a startup, the mistake is immediately to think about looking for financing. No. If you have an idea, you should ask yourself first, are there clients for that idea? Is there a market? The goal of setting up a startup is not to get funding. Financing is a means of getting the startup to grow, but it is not the destination itself.
With all the boom in startups, funds, funding rounds, sometimes there is too much noise and we lose focus. So the first thing is, are there customers, is there a market? Does it make sense? Can you do it without funding? If you can’t, what type of financing does the project need? And the normal thing is that the first investment doesn’t come from venture capital, but rather “friends, fools and family”, or business angels because you will need less money.
You need to validate first if the project makes sense and you need money to be able to demonstrate that your idea has a market and you can start to have customers. Venture capital will come later when you have shown that this makes sense. The VC can fund your growth so that it accelerates and there’s a return in a few years.
There is a lot of pre-work to do before approaching Venture Capital. That does not mean that you don’t start talking to VCs because their opinion is relevant, because they have a lot of experience, they have seen many projects and everything they can contribute can help you make your project better and manage it better. But don’t ask for money from the beginning.
Jordi Altimira
Indeed, financing a startup goes in phases. At an early stage, you invest in a team and an opportunity, because there are no metrics yet. Bigger investors and funds can enter in later phases.
We must understand that not all projects are investable from a venture capital point of view. The vast majority of projects are viable from a traditional business point of view, but they are not investable in the sense that venture capital needs a very high multiplier to be obtained in five, ten years. So we are left with a percentage of projects that is relatively low.
Alex Rodriguez
Indeed, there are projects that are not going to require external funding. There are many types of companies that are not within the fundraising bubble, which is what the press mainly talks about. Service companies, such as agencies, for example, are not invertible, not only because of the type of service they offer but because of the type of business model they have.
These types of companies are equally healthy, they don’t enter the investment game, but they are great businesses. Without going any further, the company that created WordPress considered raising capital once they were already 200-300 employees
You don’t always have to raise capital in the initial phases of a project. It is possible to go through a long, long journey without any external capital.
What does an investor need to make a decision when investing in a project?
Helena Torras
First, it should be noted that each investor has their own criteria. Business angels and VCs don’t operate the same way.
Business angels invest their money and no matter their criteria, they don’t have to explain themselves to anyone. Subjective judgment can be allowed. On the other hand, VCs have to answer to their investors and their investment thesis. Entrepreneurs have to understand what is the VC’s investment thesis.
Entrepreneurs should do some research to understand what the fund’s investment thesis is, what type of projects they’re looking for, what they expect from the founders… There are funds that only invest in unicorns, for example. So you have to understand very well what these investors are looking for. And if it doesn’t fit, you can always ask for advice.
You have to study with whom you are going to talk and to whom you are going to present your project.
Jordi Vidal
At Kibo Ventures, we always try to invest in companies that have a launched product, with a product-market fit and that are in the moment to scale and grow. And we’ve been approached by entrepreneurs who are raising a round of 300 thousand euros and that is not the status in which we invest.
It is important that you understand very well what type of investor you have to go to see in each of the moments of the project. Because it is a matter of getting the right partner at the right time. It is very important to establish long-term relationships. Venture Capital funds generally invest and are partners in companies for very long periods of time, five, seven, ten years, or even longer. If you have been able to get to know the entrepreneur and the project for a long time before investing in it, everything will probably be much easier.
Jordi Altimira
In my experience, I’ve learned that to decide on an investment, an investor needs two things. One is to have a strong and defined thesis. The other is having insightful information, it gives you a competitive advantage. If you know the project with a certain margin of maneuver before investing, you are discovering the entrepreneur, you are discovering if the metrics are met, you’re discovering a modus operandi that gives you extra information to decide on that investment.
For me, the fundraising process for an entrepreneur is one of the most artisan processes. You have to understand the investment thesis of the fund. You have to look at the fund’s portfolio of invested companies. It’s a very laborious and intense process.
Alex Rodriguez
Regarding our investment criteria, I think that funds and investment vehicles have it more explained and exposed. Business Angels are not usually so public. I encourage all business angels to say what you invest in. Because, if not, entrepreneurs are lost, especially those seeking investment for the first time.
Entrepreneurs should be very clear and direct on what they want from investors. There are two types of investors, those who just put in the money and sit in the back seat, and those who like to get involved.
I really appreciate it when an entrepreneur has done the research and comes up with solid arguments as to why I am the right investor for the project.
I invest in serial founders B2B SaaS, where I can contribute, where I can get directly involved in the project. I like being able to have an impact, I talk to many people, so it is very likely that I can generate business for the startups I have invested in. I have done it on more than one occasion. Having this clearer, helps entrepreneurs to make better contact with investors.
Helena Torras
Speaking of long-term relationships, if you meet an entrepreneur before they need the financing, the day the need arrives, you trust them because as an investor you’ve seen the evolution and you already know the founder.
It’s about establishing relationships of trust and talking about your idea without asking for money, but asking for their opinion or advice first. You have to show that you have investigated, that you know who you are talking to.
Jordi Altimira
“No” is not a bad thing. You’re going to meet hundreds of investors and probably only 3 are going to invest in your project.
Surely the majority of venture capitals and investors will be very open to giving their advice, because a VC needs to see a lot of dealflow and many projects and opportunities.
There’s another important feature of a VC that entrepreneurs need to understand, which is knowing how a VC divests.
What traits of the entrepreneur/project attract investors the most?
Jordi Vidal
The answer depends a lot on the stage of the company and the investor because each invests completely differently. That said, it is true that there are many things that are common in the type of investment that ends up going to Venture Capital.
First, we look at “the team”. 70% of our decision process depends on us being in front of a very good team. The second is the market and if it’s large enough to offer exponential growth or to achieve exponential growth. And then many other things like product, or marketing strategy.
In our case, the product is less important because we only invest in companies that already have a highly developed product and where, for example, the go-to-market and growth strategy for the coming years are very relevant. In the case of a Business Angel, it will be much more interesting to understand what is the product so far, what team is behind it, and what market is being attacked.
Helena Torras
I have a magic formula that I call MPT. M for Money. I have to be able to see a big, scalable market.
The P for passion. I have to see how the entrepreneur is really going to give their life to take the project to the next level. I especially like the ones that are mission-driven, those that are a life mission and go beyond the product itself, because they will do whatever it takes to move forward.
And the T is for “trust”. In other words, they have to inspire me with enough confidence to say “you are really the only ones who are going to be able to make this come to light.” And that trust is earned with a strong relationship.
Alex Rodriguez
I like to make first money in, first money out. I like to help the entrepreneur to get to the next round. There are many people who ask for metrics, but there are investors who bet on the idea, nothing else.
I don’t look at metrics, I look at the team. I look at the leader and notice how they think. And establish a relationship of about three months. In those first three months, or even six, I ask to see what progress they’ve made, and I like to see what the thinking strategy is, what goals have been achieved. This is the differential factor. I am much more interested in this because I know that the rest will follow. I think there is a gap in the ecosystem and there should be more actors like that.
I invest with the Itnig fund, where they follow the same thesis of investing in startups simply for having ideas without having a product. That is why I joined the Itnig fund.
Jordi Altimira
For me, that third phase of visualizing divestment is important. So you have to think a bit about how venture capital exits a project.
There are three ways. One, highly unlikely in Europe, is an IPO. The other is the selling of the company. We have to imagine that that company is going to be sold and if there really are M&A in that market, who could be the potential buyer and how not get too diluted on that path.
Another option is to exit as secondary. That means that, in later rounds, in a series B or C, when the model grows and is going to make a capital increase of 20 million if the project is very good, it will generate a lot of interest. Maybe there will be four funds that want to invest 24 million. But the project needs only 20, it does not want to take 4 million more because founders don’t want to dilute themselves more than necessary. Those 4 million are going to go to buy the initial partners, the initial investors. In this case, the ones we have invested in the seed phase or in series A. That is a very classic way out.
When investing, we have to imagine which funds are going to invest later. And if that project is going to be attractive to them. As we already know those funds, we already know what they like, and what they are going to do in the future.
It is clear that we are always going to look at the team. We also look into the potential growth of that team. If it is a team that when we invest there are five or ten people, in two years it will be 120. That is enormous growth and it is human management that the founding team must be capable of carrying out. It is very complex to manage the growth of a team.
And we also have to imagine, in projects that are capital intensive, the fundraising capacity of that founding team. In future phases, they must be capable, not of attracting national investors, but of attracting international investors.
How should entrepreneurs approach investors?
Jordi Vidal
To give an example, a company with founders who have been able to build something super relevant at the metric level in a very short time. They have been known to surround themselves with a super powerful team for the moment they are in the company, and they have the idea of how they are going to turn that company into a profitable company in the long term.
The investor has to be able to detect if they are teams with the ability to change or pivot their business and make decisions very quickly. Especially if they are businesses that have the prospect of being profitable in time and therefore having to raise money.
Jordi Altimira
For me, the investment thesis has to reaffirm you in the sense that if we saw this project again, we would invest again because it met all our requirements. We can analyze why it went wrong, but we would invest again.
Another reflection is that, without passion, nobody can stand this. Entrepreneurship is also a matter of try, fail, and follow. You fail when you stop trying. Most of the success stories are people who have not stopped trying.
Alex Rodriguez
I agree that fundraising is a very artisan process. Thinking about all the startups in which I have invested, all have been companies that I already knew the founders before investing, they are all people with whom I have developed a friendship.
I like to talk a lot publicly about the investments that I have made, for a matter of transparency, because I think people are not told much about how to start investing. I have been investing for five years and I still have no idea how to do it correctly.
There is a very paradigmatic case of a startup in which I was wrong, and it is like my anti portfolio, which is also an issue that many people like to highlight, in which you did not invest. I thought it was very small and I didn’t quite see it as a good opportunity, but they have become a very powerful company, they are raising capital and having good numbers and sales. I will always regret not having invested.
Helena Torras
There are some projects that have not gone well and that I would invest in the founders again if they come up with another idea because I’ve seen their process, the decisions they’ve made, how they’ve responded to the adversity, and also their ethics throughout the process. And this makes you want to re-invest in that entrepreneur.
It is important to understand that we invest in people, we believe in people and we would invest in people again. I invest with WERock Capital and we don’t like to be only financial investors, but to contribute knowledge and advice.
Especially in the initial phases, it is about people and relationships. In both cases of success and failure, you learn by making mistakes, because when we know we’re probably going to lose in 90 percent of cases, and that, hopefully, 10 percent of our portfolio will turn out well.
How to handle the cap-table? What percentage does the entrepreneur give to investors from the first round to subsequent rounds?
Helena Torras
There are some unwritten rules. In my opinion, valuation does not matter, it is a number in a fifty-page contract. And once you understand that, it is more important to you to find good partners, to negotiate well all that are the rest of the clauses of the contract. Because the clauses are the most important.
You need the money and the investor wants a percentage. How can it be regulated? With the clauses. But don’t just focus on the valuation, because it’s not that relevant. Negotiate the clauses well, negotiate the control terms well, the economic terms. And from here on, find partners in which you can grow and that in the end, you all win.
Jordi Vidal
It is a matter of aligning interests when an investor enters your company because they associate with you. You will be working together for many years and what an investor wants is for you to have the same to lose and gain as investors.
The investor, with a portfolio of between 50 and 70 companies, cannot end up running a company, he needs to buy the founder’s, the entrepreneur’s vision and let them execute that vision. This business is about trust and people.
Funding for startups in a nutshell
Helena Torras
The investment is not an end in itself, it is a means to grow the company, you have to find good partners. And this applies to investors, founders, and everything. And, above all, be passionate about the project and fight for it.
Jordi Altimira
I think that the management of a company is important and it’s made up of both, the founding team and the investors. The cap-table marks the quality, both in the entrepreneurial part and in the investor part. A relatively simple exercise is to investigate in which projects the venture capital or the business angel has invested, and you will undoubtedly find very clear conclusions in this regard.
Jordi Vidal
Be very clear about the type of partner you are looking for. And have a very clear financing strategy. Another very important point is knowing how to reach investors through current investors, even through friends. The most important thing is the passion you have, and how you transmit it.
Alex Rodriguez
Remember, there are businesses that don’t require external funding. I always say that you have to look for funding when there is no other way. The best cap-table is the one you don’t have to worry about. The purpose of a business is to sell, not to get investment.
Itnig and Lánzame Capital come together to answer important questions that every entrepreneur must know before going out to seek investment for their startup.ç
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This post is also available in: Español (Spanish)