Finding the right funding
Knowledge Sharing Session: Startup Funding
What kind of funding is available for startups, and where do you go to find investors willing to take risks? To answer these questions, and hopefully provide you with helpful, relevant information about the topic at hand, we have gathered three experts from various backgrounds to put the “fun” in funding.
The speakers came to Rockstart for a Sharing Session, which we organize in cooperation with Konnektid Knowledge. Here’s what we’ve learned at the first event in the series.
How to convince investors
Jaap Dekter, our first speaker, offered his advice on how to convince investors to fund your startup. Dekter believes the first step is understanding the investor’s perspective. What investors want is unlimited potential with zero risk; the reality is a little different—and that’s okay, because investors are typically aware of this. Instead, investors have to settle for a conversation on expectations and compensation, which helps them gain an overall understanding of your company.
What founders need to remember is that there is a surplus of money available—it’s just a matter of doing the right things to access it. This includes telling the right story and, more importantly, telling it to the right people. A key component in confidently pitching your company is to stop being intimidated by money. Once you remove the haughtiness that is so often attached to large sums, funding becomes increasingly more attainable.
Dekter also advised against confusing a great product with a great investment. Unfortunately, they are not interchangeable, and being aware of the distinction can set you apart from competitors vying for the same funding. Explaining to investors that you’re adding clients on a regular basis ups valuation, prompting equity to cost more. The purpose of every investment is to accelerate growth; make sure you communicate this to your potential investor, and don’t be afraid to explain why your shares are going up and how this could benefit them as well.
Our second expert speaker was Gerard Knaack, a representative from ABN Amro Investment Services. He provided much insight on informal investments and offered access to a network of roughly 600 private investors, all of whom are (ex-) entrepreneurs and can support your company not only with capital, but also with first-hand knowledge. The private investors match companies that are looking for an investment between €100,000 and €2 million in all life cycles and industries. Their service matches those that want to invest with those that need investment—an option that becomes a valuable alternative for companies that don’t qualify for a bank loan. Though private investors typically ask for financial return, minority shares, and some involvement in the company, in turn, they take risks that banks are unwilling to take. Most often, their involvement is primarily confined to corporate strategy, finance, or organizational issues, typically with limited engagement and an uplifting energy.
Knaack generously offered up some warning signals that investors tend to recoil from:
- You are not able to explain your own product
- You cannot clearly outline the need for your product
- You are not on top of your finances
- You have an unrealistic prognosis—
- —and/or unrealistic market share expectations
- You have no ear for advice and suggestions
- You have not thought about the percentage of shares you are willing to offer the investor
- You intend to use the investors money for financing existing debts or buying out an existing investor
- Lastly, but notably, you show zero enthusiasm
In addition to avoiding the above, what investors are looking for are scaling companies that are using realistic valuation, that have a clear business plan, and that offer unparalleled commitment—not just maximal effort, but financial commitment as well. Unfortunately, one telling aspect that can’t be prepared or primed is “the click.” That is to say, a certain chemistry with the private investor is just as important as anything else.
Our third expert speaker, Corne Jansen, a director at INKEF Capital, imparted his knowledge about venture capitalists. His first question to the audience was short and to the point: do you actually want venture capital?
He went on to explain that venture capital is a very risky asset class where most of the companies fail to yield a significant return. As a result, the return levels that most early-stage VCs strive for are well north of 30% IRR (Internal Return Rate). This explains why it’s so difficult for budding companies to get investment; all investors are looking for that one in a million startup that will ensure a significant return rate.
Jansen suggested clarifying what it is you want to know from your prospective VCs. Questions concerning where they are in their fund cycle, what their investment process looks like, who makes the ultimate decision to invest, how they are incentivized and how they add value provide you with relevant knowledge about the compatibility of their investment with your vision for the company. Another suggestion is to simply get to know them personally! Similar to what Knaack implied with “the click,” a natural chemistry goes a long way when deciding who you want to be in business with.
Finding out what you need for your company is imperative when it comes to finding a VC, as you’ll want to match the needs between the two. Being realistic in terms of valuation, from both the startup and the VC, will aid in this process. Make sure to contact the right people, and don’t hesitate to reach out across the pond. Jansen counseled about setting precedents; be aware that what you offer one VC, another VC may want, too. And lastly, at the end of all your countless hours of preparation and production, ask yourself, “would I want to work for this company?” Hopefully the answer will reinforce your position and propel you forward.
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