Seed and Series A fund raising: the dos and don’ts
March 5th, 2020
The Partech Shaker invited Alison Imbert, Partech Senior Associate, and Romain Dehaussy, Cambon Partners’ Partner, to talk about fund raising, a key step for all start-ups. Should you raise funds? When is the best time to do so? Who should you raise funds from? Alison and Romain share their experience and tell you everything you need to know about start-up fundraising.
Meet our speakers
Alison Imbert is a Senior Associate at Partech. She oversees the Paris Saclay Seed Fund’s technical
investments for start-ups from leading French universities and Research Centres. Partech’s seed round
investments range from €200,000 to €2M, its Venture investments are from €4M to
€15M, and its Growth investments from €20M to €50M.
Romain Dehaussy is a Partner at Cambon Partners, an investment bank specialised in the digital sector. Cambon Partners provides advisory services for growth companies at all stages of a company’s lifecycle: Venture, Growth capital, LBO, and M&A.
Why should we raise funds? Should all start-ups raise money?
Alison Imbert - This is THE question you should ask yourself before heading off on any roadshow. Raising funds must be necessary and adapted to your business model. Start-ups need to raise funds because they lose money every month to feed the hyper growth that any fund is looking for. To give you an idea, Partech is not interested in companies which could potentially generate sales of €10M but rather €100M. Here’s an example: when we invest in seed, let’s say that the company is valued at €5M; we would expect to sell it for €300M/€400M to return your fund. We are looking for companies with high growth potential.
Raising money means that you need to be physically and mentally ready to go on a roadshow every 18 months, for a long period of time. Roadshows are intense periods where you often face many refusals to get one or two term sheets. It’s a very long-term commitment as the likelihood is that you won’t build a large company in 3 years, but more likely it will take you 7.
Romain Dehaussy - Raising funds is highly complicated. In France, it’s hard to find figures. Some says that, between 15,000 and 20,000 companies are looking for cash every year. At the same time, there are 700 capital innovation deals a year. The number of start-ups is on the rise but there are less and less deals. Partech receives 7,000 requests a year and they sign one deal a week, so your chance to raise money with them – or with any VC - is very low. The odds are against you. Besides, the level of entrepreneurs is getting higher year after year.
To raise funds, you need to be highly organized and prepared, just in the same way you’d prepare for a marathon: you need to train, and you need a strategy. You’ll have to contact a large – but not too large - number of funds, find out about their legal structure, whether or not they are adapted to your needs, and if they still have some funds available. It is also important to connect with the right person within the fund (find out who does what, and their career successes to date, etc.) and to be recommended by a fundraiser or a peer or anyone else, because funds receive a staggering number of requests.
Alison Imbert - I totally agree with Romain about being well informed about the funds (what they do and don’t do) and being introduced by a fundraiser, a business angel and by attending events such as this one.
Q // After this first step, how much should I raise? How do I assess how much I need?
Alison Imbert – You need to be able to justify your cash need in terms of your goals: what are you going to do with the money? Are you going to hire people or expand abroad?
Don’t be too ambitious and proceed step-by-step with the different milestones you are planning to achieve. For example, if your first milestone is to develop your product or reach a certain revenue, then raise the money that you need to achieve that objective, and you will subsequently raise more. But anyway, we iterate with founders and suggest what is a fair amount to raise depending on their maturity and next milestones.
Romain Dehaussy – Remember that pride comes before a fall! We meet many entrepreneurs who want to raise €XM, just like their friends or their European competitors. Do not use the amounts announced in newspapers as benchmarks because they are not always correct. Instead, look at your KPIs and your needs. You are going to raise funds every 18 months and funds request a minimum growth rate of 2.5 in Serie A. How much money do I need to raise to make x2.5 over two years? Which sales target do you plan to reach in two years and how much funding do you need to reach this amount?
Q // What about valuation? What are pre-money and post-money conditions?
Alison Imbert - Start-up valuation is fictive and only becomes real when the company is sold for a specific amount. Up to then, valuation is defined by investors and entrepreneurs. At seed stage, the calculations are relatively simple, for example:
- We evaluate a cash need of €2M;
- We decide the acceptable share for the entrepreneurs, normally around 25%;
- We take 25% of the capital by funding €2M, the valuation is €8M post money (after the first round).
Romain Dehaussy – Valuation is only one of the deal’s parameters. The most important element is the % of detention at exit. Another key element is the fund itself: who are they? Are they valuable? Do you have a human fit with them (this is not really said in England, perhaps ‘do you have a good connection with them’ would be better?)? Do they know your business activity well? Do they have the resources to invest further? Can they add value to your business? The most attractive offer is not always the best offer.
Q // Can you play different VCs off against each other once you receive the term sheet?
Alison Imbert – Yes you can. It’s an important decision to make. But don’t bluff and play fair during the negotiation phase. If you choose Partech, it means that we are going to spend around 7 years together. It’s vital to compare everything, not just the valuation but all the clauses. Entrepreneurs are surprised the first time they receive a term sheet: it’s a legal document and it’s all in English. Make sure that you have a good lawyer.
Romain Dehaussy – It’s tricky to go and see other funds once you’ve talked about a term sheet with one or two funds, because funds talk to each other. They are competitors, but also partners, so beware. Also, their decision processes are lengthy, so you could end up in a situation where the VC that takes the first offer withdraws from the deal out of pride. The only solution to get competition is to organize a market by looking at different funds at the same time. You need to align your VCs on the same starting line.
Q // What is your role as a fundraiser?
Romain Dehaussy – Compared to a VC, my role can be illustrated by two types of relationships: an elderly couple with a VC, compared to a 6-month passionate relationship with a fundraiser. Our clients call us all the time.
Being a fundraiser implies 6-7 months of intense work. We intervene at all the different stages. If the deal fails, it is the fundraiser’s fault; if it is a success it is thanks to the entrepreneurs and investors. We only accept a new client if we are guaranteed to succeed at a likelihood of over 90%.
We help entrepreneurs to optimize their chances by improving how they structure and explain their business activities. We bring them our know-how and network. We put them in contact with key contacts or large groups so that they are more robust when they meet investors. We ensure their business is understandable, clear and precise. Here’s how we work: how can I explain their business to a 12-year-old so that investors can easily talk about it at their next committee meeting and convince their colleagues? Remember that VCs see numerous start-ups, so you need to give them a few, very solid arguments.
We help them to pitch. After many years in the business, one knows (almost) all the mistakes to avoid. We always start with a warm-up in our offices followed by a pitch with a fund we are not very interested in, so that our entrepreneurs can practise. I strongly recommend that you practise your pitch many times and start your round with a fund which is not your key target.
Q // How do you pick the right fundraiser? Is being introduced by a fundraiser a guarantee for quality?
Alison Imbert - Make sure that you choose a good fundraiser such as Cambon, one of Paris’ top fundraisers. Take a look at the companies they helped to raise funds. Fundraisers know our codes and our vocabulary, so they can act as a filter. Don’t use a fundraiser in seed as the stakes are lower and, at this stage, we invest in the entrepreneurs: we want to see how they manage their projects. Use a fundraiser from Series A.
Q // You suggest that ideas should be repeated many times to investors: should we build a relationship with one or two VCs before the fundraising round so that they really understand our business?
Romain Dehaussy – Companies often talk about their 10 advantages, but they should really identify their top two or three incredible ones. Make sure you always stick to the same precise and focused message. I recommend meeting a maximum of two or three VCs before your round. Choose investors who are going to give you feedback.
Alison Imbert - Choose two or three VCs you trust with whom you can have regular updates and ask advice. You should always leave the meeting with tangible inputs. However, beware because investors are investors and not your friends. Never speak openly and be careful about what you say: VCs take notes about everything you say and will challenge you if you don’t achieve what you said you would.
Q // When pitches are very relaxed, does that mean you have a good chance of signing a deal?
Alison Imbert - We receive around 25 requests a week. The first person you will meet is someone from our sourcing team, with no decision-making power. After this meeting, you might think that you have a 10% chance of signing with us, but the reality is much lower: 1%. When we are interested in a company, we, the Investment Directors, meet the entrepreneurs. Again, you may get positive feedback, but you’ll only have a 10% chance of going on to the next stage. We provide you with as much advice as possible and might put you in contact with our corporate network platform, but that doesn’t mean that we are going to sign a deal with you. After a company pitch, you may believe you have 90% chance, but in reality, it’s more 50% or less. We only invest in 1% of the companies we meet – but we will be always nice (and challenging!).
Q // Does this mean that it is important to keep a record of who you have seen and never give up?
Alison Imbert – Yes it does. Keep a record of who you meet and what you have told them, etc. Tricky questions don’t mean that you have failed. It is very difficult to read funds. Fundraisers know us, our processes and how to decode us. Each fund operates differently with its own processes and way of working.
Romain Dehaussy - I don’t really agree with Alison on this. After a meeting, you never know if the fund will continue or not. As fundraisers, it is hard to always be sure exactly how to understand different funds. I have been wrong with many of my prognostics, especially with different nationalities such as the Americans who find everything “amazing” and “outstanding”. I remember a meeting with a Russian investor who kept on criticising everything during the presentation and we still managed to sign the deal a couple of weeks later!
Q // Do your relationships with start-ups change after fundraising?
Alison Imbert – At Partech, and especially in the seed team, we really enjoy helping entrepreneurs. I strongly believe that we can help our companies in seed because we have experienced so many cases. We build up strong, trust-based relationships with our entrepreneurs - the investor in seed is the first one to believe in it and invest in your company, it creates something (by something do you mean a bond between investor and entrepreneur? It might be best to elaborate on ‘something’). My role is to give you as much advice as possible and to help you find solutions because we have the right network and experience. We also organize events, workshops and introduce you to corporate contacts and journalists.
Romain Dehaussy - The relationship is very intense for 6 months with calls, emails and messages day and night. Once the deal is signed, we are kind of put aside. We often miss our clients! When I see some information or an idea or people that could be of interest for my client, I forward it to them. They might contact us again for the next round, or look for a new fundraiser, or go it alone.
Q // How much does a fundraiser cost?
Romain Dehaussy - We have a small retainer fee (handling expenses) and we are paid according to results. The % depends on the size of the deal. People often talk about our price, but they most of the time forget to mention their high value!
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