Is your startup on the road to scaling up abroad and preparing for an international financing round? It’s not uncommon for founders, who are often excellent team leaders, engineers and innovators, to fall short when it comes to explaining why their startup is an attractive investment.
If this sounds like you, then you need to speak to Daniel Michel. Daniel is Head of Access to Finance at EIT Digital Accelerator, and spends most of his time connecting promising high-growth tech startups to their community of 1000 investors all over Europe. He is an advocate for a more connected European ecosystem and sings the benefits of seeking larger funding rounds outside your nation, as well as being an expert on coaching founders to funding success.
We spoke with Daniel to get some of his top tips, to help founders looking to land their next international investment and scale across Europe.
Daniel, you are Head of Access to Finance, at EIT Digital Accelerator. Can you describe this role a bit more in detail – what are your goals, and tasks?
When I joined EIT Digital five years ago, I was asked to set up an ‘Access to Finance’ programme to help high-growth digital companies prepare for their coming financing rounds. We didn’t call it fundraising or investment as we don’t invest in companies – that is not our role. In ‘Access to Finance’, we help companies prepare to get financing. When you are CEO of a company, you are very good at what you do technically, but when it comes to raising money and finding investors to invest in the company, it’s a very different job. For example, the CEO would never do the job of a lawyer, because he doesn’t know the jargon, let’s say. And similarly, on the fundraising side, we need to teach the CEOs the financial parlance to present their company in the best way to investors. Because what matters is not describing the product, nor the latest features of the product. It is to tell the story of why it is an attractive investment case – how does the company make revenues today and how will it make revenues in the future.
Can you share some numbers, such as how many startups did you already help to get funding and also what is the typical type of startup that you support, in terms of the stage?
We help companies who already have a successful product that can expand to, or that are already present in, several countries in Europe. Companies that are raising an A or B round from €2 to €20 million. Scaleups that have gone through the first stage of growth, with teams of 10 to 30 people, with €1 to €5 million in revenue. These companies are faced with the challenge to raise further funds, which is more complicated. This is where they need our help to grow across Europe and to complete an international fundraising round. The smaller rounds can often be raised at the national level.
There have been mixed signals of economic slowdown in some countries. Do you think that access to venture capital in Europe and across the world will get harder or do you see it continue to grow in the next few years?
It is always a risk because we live in a global market, and are not the centre of the world, and with other dominant countries like China and the US, crises can happen from anywhere. Overall, it is extremely important to invest in high growth companies. When there is a market downturn, which happens statistically every 7 to 10 years as we know from history, financial investors will be the first ones to withdraw. However, we also saw that during the crisis that corporates continue to invest in strategic projects, as they know that it is essential for them to be focused on the evolution of their industry and keep up with innovations in their verticals. Unlike the stock markets, the VC market tends to go through the crisis with less injury, because there is always money to invest into high tech innovation and new ideas.
At EIT Digital you and your team also coach startups on fundraising. What are the common mistakes you see founders make when they approach fundraising?
Firstly, I think one of the biggest mistakes is to speak to investors too early, without being prepared. You only have one chance to make a good first impression – if you fail to present well in the first 10 to 30 seconds, you’re out. Don’t speak too early to investors without being prepared, without having a clear message. We see too often CEOs, who are truly impressive smart engineers, loose their interlocutors on technical discussions, when it is more important to present customer use cases. Secondly, try to get external insights on your business. Thirdly, contacting investors appears very easy – just spend half an hour on Google you will find 100 of the biggest investors out there, but these are unlikely to invest in your business. Looking for more detailed investors, specialised in your space, your size of company and geography takes often much more time, and is best done by people who do this regularly.
Can you explain a bit further the investor network – how big it is, what % is corporate venture capital and what % is private venture capital?
Yes. We have a network of over 1000 investors across Europe and beyond. In each country in Europe, there are different typologies of investors: financial venture capital investors, corporate venture funds, family offices and the sovereign or regional funds. Regarding VCs, we have at the very least 20 VCs per country, and up to 100 when you go to countries like France, Germany or UK. Some are active, and some have just closed a new fund, which is important to know. VCs are also very easy to identify, because they do a lot of advertising to become known. Then, regarding corporate venture funds, the fact that they want to invest in your company can be very beneficial, because it shows a validation of your technology and business model. Unfortunately, in Europe, attracting a corporate venture fund can be difficult as some only make one or two investments per year. Overall, the amounts raised by startups in Europe from corporate venture investors is less than 20%, which is far too low. Corporates are cautious – they only invest in really strategic innovations in each industry. Then you also have the ‘family offices’, like the funds set up by the families who sold a successful business in a specific area. Family offices historically prefer to invest in private equity, due to strong risk aversion. We don’t have enough of this category of investors in Europe when compared to the US. And then finally, we have the national or regional funds like Bpifrance, High-Tech Gründerfonds and Almi, which exist in every European country. We must not forget them because are often good co-investors. They will never take the lead on the round – they would not take more than 49 percent of an equity round – and bring also an image of high-quality to the companies they support.
Overall, if there is one message that we should get out in Europe, it is that we should encourage people to invest more in the real economy, including startups and high-growth tech companies. In Europe, around only 20 billion have been invested in venture capital and private equity last year. In the US, it was 100 billion – five times more. In Asia, it was 80 billion. In total, Europe represents only 10% of the investment worldwide going towards innovation and the financing of the fast-growing companies of the future. We must improve the attractiveness of this asset class in Europe.
You just mentioned the gap between the venture capital market in Europe and the U.S. Maybe there’s also a lack of risk taking in Europe. Do you see a trend of Europe catching up or is America growing faster?
During the last 10 to 20 years, there was always a ratio of 1 to 5, or 1 to 7, between US and European investments into Venture Capital. This shows that European investors are dedicating fewer resources to this type of investment and this also means that we have to use these resources in a smarter way. The US invests more, because they have more and bigger VC funds with often more than a few billion of assets under management. Also there is a cultural phenomenon as US citizens are more eager to invest in high-tech companies, hoping to contribute to the success of companies lead by people like Bill Gates, Marc Zuckerberg, and more recently Elon Musk. If you are one of these successful entrepreneurs, then you can afford to allocate a few billions to a venture capital fund. In Europe, who is really able of doing that? Not many people. And when you look at most of our billionaires in Europe, they made money in traditional industries, not high tech, and therefore don’t necessarily invest back into high-tech companies. In this sense, we need to have more super-successful entrepreneurs in high tech to fill this venture capital gap, and then follow a waterfall model where they have enough resources to invest back into high-tech companies. We must encourage the wealthy people to invest and develop their businesses here in Europe, it is essential for our economies going forward.
For scaleups that are looking for coaching and fundraising help, what’s the best way to get in contact with EIT Digital?
We have offices in 11 countries in Europe, but the best way to get in touch is via email or by filling out our online form. We usually respond very rapidly. When we call you back, we will try to understand what your need is, if we can help and how we can help. If the company is too early stage, we pick up the conversation later with them. So, we really want to speak to any European digital company with €1 million or more revenues, and that is expanding internationally.