Startups around the globe rely heavily on VC funding to grow and expand their activities. Many successful startups have raised capital more than once over the course of the years. The VC industry knows no slow down. In 2017, we saw an increase of about 50% in comparison to the previous year in VC activities. It’s interesting to note that the increase was a global phenomenon, not limited to the U.S. Competition among VC funds, especially in the EU market has also increased, seeing about 17.1% of U.S. funds participating in local deals.
Although the amount invested has increased over time, the number of deals closed in the last few years has decreased.
Many startup founders struggle to understand how VC operates. For this reason, we talked with Iva Matasic, a leading business advisor for many startups and international keynote speaker. At the Oslo Innovation Week, with the support of the Founder Institute, she presented the top VC trends that every entrepreneur should keep an eye on.
See Also: Top European Startup Accelerators 2018
VC Trends To Keep An Eye On
“To understand what will happen this and next year in the VC industry, it’s important to look at the last 8 years of activities,” says Matasic, who has been involved in the business world for the last 15 years of her career.
Starting in 2010 there has been an increase in deals and amount closed in the European market. The graph below by Pitchbook shows the trend.
“Obviously, we cannot compare the US and the European VC market and operations. Many VCs based in the US have been active internally for many years. Recently, however, they have started to look into European-based startups, establishing local branches.”
In the past, European-based startup founders had two options: pack their bags and go to the US with the hope of closing a round of funding or find some creative ways into the US VC funds big pockets. “Before the whole Brexit issue started, many founders from mainland Europe used to establish their company in the U.K. as it was easier to access US capitals. This, however, has changed now.”
How Are European VC Funds Evolving?
First of all, European funds have now gathered enough knowledge, and capital, to pro-actively help startup founders through their journey. Although still not at the same level as US (and with a more risk-adverse mentality), in 2016 European funds raised $6.4 billion, matching the positive trend in investments in the region. “On top of this, in some part of Europe, like in the Balkan region, we can see how things have changed dramatically. Six years ago there were no funds of any type. Today we have more than fifteen!” says Matasic, who was born and started her career in Croatia.
With more opportunities coming to this side of the Atlantic, startup founders need to consider whether there are differences between US and European funds and what they need to do to close that gap. “The good news is that what works in Europe, works also in the US. VC funds are looking pretty much at the same things, regardless of location. The team is the most important point. Product and traction come later, depending on the stage your startup is in and what round of financing you are looking into”, says Matasic, who is also actively mentoring startups in the USA and knows well how the two realities compare.
To Raise Or Not To Raise?
The reality though is that nowadays startup founders don’t need only cash, they need “smart money. This is crucial for any startup”, Matasic points out “there are a lot of founders who go out and look for money, but in most cases, they don’t need it. They just need smart advice and good market research”.
Startup founders might think that raising capital is equivalent to a market confirmation. The logical train of thoughts for many first-entrepreneurs would be “If I raise some sort of capital, it means my idea is worth attention and more funding”. However, many miss the point that adding board members only increase the number of activities and voices they will need to hear while working on their startup. It is well known that VC funding does not mean success.
Towards Data Science has gone a bit deeper and looked at the relationship between failure with rounds of funding and exit opportunity. The rate of failure to exit decreases as a startup progress through its journey, which makes total sense as the company matures. It is also interesting to analyze how the rate of failure to raise the next round progress. It seems that startups have more opportunities to get acquired than raising capital passed Series B.
What About The European VC Market?
“In Europe, many founders lack a clear understanding of the VC world”. There are so many options out there for entrepreneurs looking for funding that the difference between the good, the bad and the ugly might not be clear.
Matasic continues telling us about how South Eastern Europe, Balkan region, for example, has been growing exponentially in the last few years. “There are about 20+ million people in the area, however, we can see how some countries are working harder than others to create a sustainable environment for entrepreneurship.
For example, in Bulgaria, the government is supporting investment in many categories, among which startups.” However, the competition in the area is quite tough, due to the fact that international companies scout local talent with higher salaries”.
Croatia, Slovenia, and Serbia are very active when it comes to the startup ecosystem, but generally speaking there are two major limitations in South Eastern Europe: a) too much of a local focus and b) lack of sales capabilities.
For this reason, also the level of investment is not really competitive. “Angel investors in the region are not really “angels”… they take some equity to give you pretty much the equivalent of a return ticket to the States”.
When Is A Good Moment To Look For VC Money?
Depending on the startup, the need for funds might change. Generally, “if your company is service focused, you should get out and sell rather than raising capital. On the other hand, for tech-heavy startups, raising capital is a matter of life”.
As said previously, raising funds is not a synonym of success. “If you raise money and you don’t need it, then you will end up failing most likely. I have seen this so many times. Startups raise capital that is not needed, not have a clear strategy and they start hiring people, rather than focusing on traction and sales. That’s when things go down” Matasic continues.
Among the top 20 reasons why startups fail, as a matter of fact, running out of cash and a weak team take the 2nd and 3rd spot after only a product/market fit issue, according to CB Insights.
Investment Firms Have Evolved Greatly In The Last Few Years
Early stage VCs have expanded their knowledge greatly in the last years. “6 years ago, you could get cash just by having a nice PowerPoint and a strong pitch, but not necessarily traction or a finished product”, Matasic explains. “Today, VCs and startup accelerators are much more knowledgeable. They have invested quite a bit in their own education and today startup founders can’t get away without some proper answers to tough questions, such as traction, product/market fit, and so on”.
Startup founders need to be ready to hustle, “they need to have” what Matasic calls “the entrepreneur DNA”. Entrepreneurs have to adapt quickly to market conditions and customers’ responses.
It is clear that VCs are going to invest only more in new startups. In recent years, we have also seen how big corporates have started playing the VC role, creating corporate startup accelerators, for example. For startup founders, it is important to be more focused on important metrics and let go all the fluff. If you get results, you will grow and achieve success.