The six parts of a simple fundraising story

When raising money for a startup, there are several ways to build a pitch deck. I believe it is easier to create a great pitch deck if you build it on top of a simple and attractive fundraising story.

The fundraising story should help an investor understand (and be able to re-tell to colleagues) what you are doing, why it is important, why you are likely to build a large company, present some proof points that it is already working, and explain why you are the team to back. The primary goal is not to describe that a specific trend is important or what the market looks like.

I think the fundraising story for a seed round (or later) can be built using only six parts (which then can become twelve slides in a pitch deck and a large number of supporting documents if needed). The six parts of a simple fundraising story are:

  1. Define the problem, why it is important, and if possible why it is not already solved.
  2. What is your insight about the problem that allows you to solve in a better way than others and how big will the market be when you solve it.
  3. Describe what your product does (in as clear, jargon-free language as possible) and the key advantages users get from using your product, and why it is better than the competition.
  4. What is your current traction (e.g. growth in users, revenue and/or ARR) and what metrics (e.g. retention, renewals, NPS etc) show that your ‘economic engine’ is working already today, even if at a limited scale.
  5. Present the the team and explain why it is the right team to build this startup.
  6. How much are you raising and what you are going to achieve (not what areas of the company you are going to spend the money on) before the next round.

In which order you present the parts can differ depending on setting and medium.

This is an early version/first draft, so feedback is appreciated.

Venture capital is the worst form of funding, except all the others

Edward Norton is one of my favorite actors, but his comments at Brilliant Minds, as shared by Lise and Caroline, about the old VC model of spray and pray and high growth not working for meaningful companies has lingered in my mind since reading it earlier today.

For cash-poor founders Silicon Valley-style venture capital is the worst form of funding, except all the others. It is a funding type that fits a specific type of companies (that can be meaningful), but for that type of companies it is 10x better for founders.

Venture capital sometimes is held up as an example of something that isn’t working. That critique is sometimes fair, not least as venture capital is not a fit for many companies (three reasons being perceived as a small company, growing slowly and being very capital intensive). However, something that is small and is growing slowly is unfortunately unlikely to make a significant positive impact on the world.

Sometimes the critique is given by someone who is selling a new style of investment to investors and is using the weaknesses of traditional venture capital as examples of the status quo that needs to be changed.

However, one should remember that venture capital has an amazing track record of funding companies that have made a significant positive impact on the world at scale. And doing so in a way that has made money for founders, employees and fund investors like pension funds, foundations and endowments. And I think it will continue to do so.

When 5 years is short term (making money when angel or venture investing)

Investing in startups is one of the most meaningful types of investments. The impact on new products, job creation and a better future is clear. But there is one big drawback, it usually takes a long time to get one’s invested money back.

European venture capital is back to normal, early-stage holding up in 2023 vs 2022 and 2021

Atomico has released the latest update of State of European Tech.

Venture investments are down from 2021 and 2022, but the data indicate that 2023 is likely going to be the year with the third highest amount of capital invested, at several billion dollars more than 2020 and 2019.

One cyclical effect of boom times like 2021 and the beginning of 2022 are mega rounds. Those seem to have gone away in 2023, except for AI companies. Looking at early-stage investments (rounds smaller than $15 million), the year-over-year drop is much lower (maybe 10-15 % from $19 billion to $16 billion for the full year).

One interesting datapoint from a Swedish and Nordic perspective is that startups in each country haven’t attracted a lot of capital (e.g. less than Swiss and Dutch startups), but as a group the Nordics seem to get into fourth place behind the UK, France and Germany.

My guess is that the lead of the UK and France in particular will get increase in 2023 as they are stronger when it comes to AI with the heritage of DeepMind in the UK and Meta’s AI operations in France.

Seed rounds of different sizes

My friend and former Spotify colleague Sriram Krishnan (now a partner and co-founder at Kearny Jackson) has written a good (and short) post called Funding Landscape.

It is about the nuances of raising pre-seed and seed capital, with a U.S. perspective. Despite the U.S. perspective it still is very relevant for the Nordic situation.

The two most common types of rounds are practically identical between the U.S. and the Nordics:

  • a pre-seed of $0.5-1.5 million raised at a $4-10 million valuation
  • a seed round of $2-4 million raised at $10-20 million valuation.

Sriram also gives two good pieces of advice to founders when it comes to fundraising:

  1. Understanding your funding needs and managing the expectations associated with capital raised is important. 
  2. Take the time to research and identify the investors who typically participate in each seed round. 

Sequoia Capital splits in three (big is great, but highest returns comes from smaller funds)

Sequoia Capital will be splitting into three regional investment firms in the beginning of 2024. The three companies will be Sequoia Capital for US/Europe, HongShan (China) and Peak XV Partners (India and Southeast Asia). Some background in Forbes.

Splitting up is going in the opposite direction of consolidation, which is what Christian Sinding, CEO of EQT, told Bloomberg (as reported by that he sees coming among alternative asset and private equity managers (which is much broader than venture capital).

Larger venture funds allow pension funds and other institutional investors to invest larger amounts of capital, which is valuable/useful and could be a driver of consolidation. Even after splitting up Sequoia Capital and HongShan and Peak XV Partners will be major players in their respective geography.

However, in venture capital there are diseconomies of scale, especially for early-stage investing. There are limits to how much money can be invested at seed and Series A. Therefore the best performing funds historically, when measuring profit in the number of times capital is returned, have been quite small in the $50 million to $300 million size range. Like Earlybird Digital East Fund I at $150 million with a 24.9x return (as of 2020) and Creandum II at ca 70 MUSD with a 13x return (as of 2019).

Interview with Hampus Jakobsson (Pale Blue Dot)

MCJ Collective interviews Hampus Jakobsson of Pale Blue Dot, a Malmö-based venture capital fund investing in climate tech companies. The interview covers starting Pale Blue Dot and many technical aspects of venture investing raising capital for Pale Blue Dot from limited partners, what level of ownership to target in a startup, reserves for follow-on investment, how to make decisions, a bunch of things around investing in climate technology startups and much more.

Interesting both for investors who want to get insight into a peer and for founders who want to better understand how venture capitalists think.

Back to normal

The average valuation of a software company at IPO informs all valuations from pre-seed to Series F. The reason being that “the prize” for companies reaching growth goals and getting to “the next level” is the valuation at the IPO.

At 7.4x revenue 2022 valuations are still a higher than the long-term trend around 5x. Exactly where the average valuation should be is as much driven by the companies going public as “what’s the historical”. If today’s companies are growing faster and are more profitable, they should have a premium valuation compared to historic numbers.

‘Dirty’ term sheets

Raising money is hard. Raising money when things are not going well is even harder.

That doesn’t mean that every term sheet with a low valuation or tough demands is ‘dirty’ (as reading Breakit might make you believe).

There are dirty things like pushing the founder out and very short deadlines that in my mind always are dirty. In 99% of cases I’d put participating preferred liquidation preference as dirty, as in any normal fundraise more than 1x non-participating liquidation preference isn’t necessary.

But sometimes the situation is so bad that accepting terms that are normally considered dirty are better than going bankrupt. Because most often the alternative to accepting a ‘dirty’ term sheet is running out of money, not getting a ‘clean’ term sheet at an acceptable valuation.