I am lucky.
Every week I meet enthusiastic, super smart and energetic founders. Full of ambition and drive. Building startups that can make a positive impact on the world using new technology and new ideas.
It’s stimulating, fun and inspiring.
Fintech, biotech, AI, Big Data, edtech – they’re all breaking new ground, providing fairer, faster, cheaper and easier ways of solving problems.
Problems that are sometimes obvious, problems that we didn’t realise existed or thought we cared about.
But why is it that tech founders often struggle to get funding to move their business beyond early seed investment?
The first reason: we are experiencing a maturing seed market.
In the UK, even though we have had the ‘B’ word hanging over us for over 3 years and headlines (depending on your preference) of doom and gloom, this has not stopped entrepreneurs from launching new businesses. The number of new tech companies launched in the UK increased by 14% in 2018.
And the investment community isn’t holding back either. According to Beauhurst, the first 6 months of 2019 saw the best first half of the year for investment on record, with a 15% increase in the investment received by UK startups and scaleups.
In addition, the number of deals rose 10% since the previous half.
All good so far.
But (another dreaded ‘B’ word), the attitude towards seed stage investments is changing.
In their April V21 report, Wing Venture Capital in the US stated that seed is the new series A, and A is the new series B.
Don’t believe me? Read it here.
In summary, their analysis shows that early stage VC funds in the US are investing later, at post-revenue stage, and investing much higher amounts. Consequently, seed stage is now having to raise more, and more often, to get to Series A.
Wing Venture Capital aren’t the only ones saying it. Beauhurst has seen this trend too in their UK data tracking report (see Chart 1).
(Chart 1: Equity investment market update: H1 2019, Beauhurst, 18 July 2019)
This chart shows that even though the total volume of investment has increased, the majority of that investment is going towards more mature startups. Why? Because post-revenue businesses are lower risk, providing more assured return on funds.
This is further supported when you see the decrease in number of first round investments completed in 2018 compared to previous years (see Chart 2).
(Chart 2: Number of first round investments completed over time, Beauhurst, 24 July 2019)
That’s not to say there isn’t activity in early stage. It’s just getting harder to raise investment at pre-revenue stage.
The second reason: tech founders have fallen out of love with the problem.
This is both a personal observation of mine and a point of contention that’s come up in conversation with investors.
Expert founders, despite their incredible technology, are struggling to engage the (declining?) investor audience.
They’ve fallen in love with their product, what it can achieve, the IP they have created. They’ve fallen for what it is and how it works.
But they’ve forgotten why it exists.
Or in other words, the problem that they are solving.
This is the human side, the emotional hook.
Investor deck after investor deck will show what the tech does and how it works. It’ll include a myriad of complex flow charts, data charts and diagrams. It’ll be shiny and detailed and rational.
In fact, one founder I met managed to speak a full hour explaining the technology behind their platform. What they failed to explain, however, is why I should care.
Why was his product important? What problem did it solve? Why now?
Some reports claim that only 5% of investor decks submitted to investors are read beyond the executive summary. Couple that with the volume of decks they’re receiving – one early stage VC claiming they receive 2000 decks per year, review 600, meet 50 and invested in 7 startups – getting their attention is tough.
Tech founders need a razor sharp, clear and concise proposition that articulates the problem and the opportunity.
Sounds obvious, I know, but it’s not easy.
At FutureKings, our Minimum Viable Brand programme includes a What?Why?How? workshop where we specifically interrogate the purpose of the company and technology. We help founding teams refocus on the ‘why’, and to get them to fall back in love with the problem that they are solving.
Because if investors fall in love with the problem, then whatever tech solution you offer will sell itself.