European venture capital’s history

“The European venture capital ecosystem has evolved over the last decade. It used to be the case that only a few VC funds were active in just a few cities such as London, Paris and Munich,” said Alex McCracken, Head of Venture Capital Relationships, EMEA.

“Today, there’s enough capital available from early to late stage, with investors active in most key capital cities in Europe and entrepreneurs who can build category-leading companies that are globally successful,” McCracken said. While the U.K. is still the leader in venture money invested, Germany and France aren’t far behind, according to PitchBook data. Spain and Switzerland’s VC landscapes have also grown substantially over the past 10 years. 

Timing for venture capital

Venture capital is beneficial for companies with:

• Unique “know-how” or intellectual property: “Founders with significant intellectual property need to find an investor that understands their sector and technology really well,” McCracken said. Venture capital firms can provide useful advice and contacts as well as money. For example, venture capitalists can help companies make decisions about how to pitch their solutions to customers and whether to license or sell their technology to achieve the greatest returns. 
• Long time horizons: Companies in certain sectors—including cleantech, software, fintech and health tech—have longer time horizons to bring products to market and scale revenues. Working with venture firms with a deep understanding of these sectors and their end customers can benefit these startups. Founders should research VC funds to understand their sector, stage and geographic preferences before getting a warm introduction to the fund’s partner or principal specializing in their sector.

Strategic funding options

“As the macroeconomic global backdrop evolves, founders should aim to have optionality with capital sources and think about optimizing their capital structure,” said Holly Comyn, Debt Solutions Specialist for Innovation Economy in EMEA. 

While venture capital is a popular choice, venture debt can play a crucial role in supplementing growth at various stages of a company’s trajectory.

Venture debt also reduces dilution for founders, provides a helpful liquidity buffer to increase resiliency, and enables a company to avoid a potential equity down round.

How venture debt is being utilised is evolving, with it “increasingly being deployed for more targeted use cases to fuel growth such as capex investment, customer acquisition cost spend and strategic M&A to support longer-term enterprise value accretion,” Comyn said.

Common mistakes when seeking venture capital

Founders should be well-prepared and transparent to avoid pitfalls, such as:

• Underselling the team: During pitches, many founders mention previous employers without explaining the key achievements and relevant experience they gained there. “What did you actually do at those jobs? Did you drive huge revenues? Solve technical problems? Do you have useful industry contacts?” McCracken asked. “You've got to realize VCs are backing the jockey, not the horse, at early stage.” 
• Overestimating their attractiveness: Many founders assume they’re the best thing the VC has ever seen. However, that’s usually not the case. “Founders don’t realize how high the bar is. VCs know a lot of very successful serial founders who have successfully sold businesses and made money,” McCracken said. “Most companies that receive VC funding have millions in revenue, which they achieved by investing their own money or getting money from friends, angels, customers or crowdfunding before they approach VCs.”
• Misunderstanding VC math: Founders often request several million dollars in funding, projecting their startup will reach $50 million in revenue in five years. McCracken poses a few questions: “Firstly, what are you going to spend the millions on that will enable you to grow revenue by 200% to 300% in 12 months? Secondly, $50 million revenue in five years is not enough. To interest a VC, you need to show you can achieve hundreds of millions of dollars in revenue and make a $1 billion or more exit in eight to 10 years. Understanding how VCs think is crucial before pitching,” he said. “Investors are very thorough in their due diligence,” Comyn said. “They’re scrutinizing business models and financials—including unit economics and capital efficiency. They also assess the achievability of growth projections by doing customer reference calls, so projections must be credible.”

4 keys to successfully raising venture capital

The venture landscape is competitive, so it’s important that startups: 

1. Prepare in advance: Founders should prepare at least a year before they run out of cash. It usually takes six to nine months between first meeting VCs to closing funding. In the meantime, founders should have sufficient cash to keep the business running.
2. Listen to advice from your network: Founders should seek feedback on their pitch from advisors who understand VC funding and their sector, prior to pitching VCs. Advisors can help you refine your pitch and slides. “Go to someone who’s raised venture capital before and ask for their advice,” McCracken said. ”Someone will usually help.”
3. Fundraise in small amounts: “The best founders typically pitch for enough money to last a year to pay staff and develop product with a bit of contingency. Don’t try and raise tens of millions of dollars if you don’t need to spend all that in 12 to 18 months. Focus on spending prudently to generate revenue as fast as possible—don’t spend on expensive offices or first-class flights.”
4. Choose a VC you can work with: Raising your first round with a VC is the start of an eight to 10-year journey together. You will spend a lot of time with the VC firm, so ensure this is a relationship that can work for you and your board.