I’ve just come back from Denmark. I attended an “unconference” in Brydegård, along with a handful of robotics startup founders, some angel investors, representatives from the Odense municipality, some CVCs, and two other venture capitalists. At a certain point, the conversation turned to the merits and disadvantages of the various sources of funding represented in the room. Each investor fought their corner valiantly, but I was surprised by how surprised everyone was. The candid, frank discussion helped founders and investors alike realise what to expect from whom, and how each bunch is (generally) perceived. The group therapy was as informative as it was cathartic, so I thought I’d write up some of the key takeaways. 

In this essay (generous), I’ll explore how the fundraising decisions you make at the very earliest stages of building your business can impact its long-term trajectory. I’ll unpack the good, the bad, and the ugly about VCs, angel investors, CVCs, and grant funding, explaining how we all think and how to navigate our expectations. I hope to persuade you to protect your cap table with your life.

Let’s start with venture capital.

Venture Capital: The Imperfect Perfectionists

Most businesses should not raise venture capital. Venture has been made to look sexy by its prominent success stories. They make it easy to ignore the rather more patinaed ‘other side of the coin’.

Vilfredo Pareto comes up a lot in my day job. His #1-best-selling-airport-W. H. Smith’s ‘law’ is better known as the ‘The 80:20 Rule’, explaining that 80% of consequences result from 20% of actions. This applies with spooky regularity across most aspects of VC (percentage of portfolio companies accounting for total portfolio revenue; number of sales initiatives tried responsible for total revenue uplift; distribution of LinkedIn ‘likes’ compared to volume of content published). This law also laid the foundations for the Power Law, which informs not only how we think about what success looks like, but also how we operate.

It influences the way we make investment decisions in the following way: we think every investment needs to ‘return the fund’. SuperSeed is currently investing out of its $50m Fund II. Let’s say we invest $1m, and acquire 17% of a business at Pre-Seed. Assuming we have been diluted down to 10% by the liquidity event a few years later (we live in hope), our expectation, to achieve a good outcome, is that the 10% we own is now worth $50m, implying an exit valuation of $500m. At the time of writing, you’d need about $71m of ARR to exit at $500m. 

It influences the way we operate, too. Venture firms are small. Most early-stage firms will have up to 5 investors, three or four of whom will be senior enough to run investments end-to-end, and subsequently “look after” the investment. In our case, that means board directorship or observation, because we’re very hands-on, but in all eventualities, firms will monitor and query performance data, help businesses raise future funding rounds, introduce them to commercial opportunities, and so on. Consider what we have established about the Power Law of venture returns in conjunction with the basic premise that venture firms are run very (read: too) leanly. 

This introduces a ruthlessness that encourages lots of investors (especially in the US) simply to write off businesses that are “off-track” (underperforming benchmark). This, in itself, is a painful process. Losing the support of your lead investor not only means you won’t see any more of their capital, but it makes it hard to raise from anyone else, too. 

“If the lead has written it off, why should we back it?” 

Fair question. This becomes more painfully true as you increase the profile of the lead investor. If an unknown investor chooses not to reinvest, the market may look past it. 

“Maybe they ran out of cash, tiny emerging manager that they are”; 

“Maybe the Partner has fallen out with the founder – it happens in early-stage businesses”; 

“Maybe they’re idiots and they’re missing the potential this business has!” 

But, when you’re dealing with Tier 1 investors, if they don’t take up their pro-rata (reinvest, at least what they are entitled to according to their preemption rights, in the subsequent funding round), your business is suddenly unfundable. No such flexibility of perception exists in this realm: 

“If Balderton isn’t coming back in, I ain’t touching this.” 

Sophisticated, established outfits might be marginally better than others at choosing where to deploy first cheques, but they should be significantly better than most at deciding where to allocate reserves. 

The other, even uglier influence of chasing top-vigintile returns pertains to investors’ rights. The venture capital model is to take minority ownership stakes. Venture investors do not control a shareholder majority. As a result, they often require consents/rights as conditions to their investment. If we don’t own enough of your business to make executive decisions, then we’d like to have a say when founders want to make extraordinary decisions that have the potential to impact the business negatively. Spending above a certain threshold in a month, hiring above a certain salary band, and issuing equity in the form of options are all examples of fairly typical investor consent matters. Used wisely, these rights exist to protect the founders, the business, and the investor alike. 

Sadly, the ambition of the venture capital model sometimes lugs with it the baggage of egotism, and there are investors, more than any of us would like, who exercise these rights unreasonably. They make a founder’s life more difficult instead of acting as a positive force multiplier, as all investors should. Founders should not be fearful of investor rights. SuperSeed asks for the examples I gave above, among others, in exchange for its investment. There needs to be a level of trust between the founders and the investor that these rights will only be exercised contrary to the founders’ wishes in extremis, and frankly, if that level of trust does not exist, then irrespective of the terms on a doc, the partnership already sounds ill-fated. 

Where founders absolutely should kick off, incidentally, is on certain liquidation preferences. They’re ubiquitous, often in a 1x non-participating format. These, to me (and indeed to SuperSeed), seem reasonable. If an investor offers you 3x participating at Seed, run for the hills. 

Enough about us. Alternative financing options are available.

Angels: Saviours of the Earth?

In most cases, yes. 

There are three main tiers: the Top 40 bangers, the brilliant middle, and…the others.

Seraphs: Michael, Gabriel, Raphael

There are many exited entrepreneurs whose ‘Day Job’ is to angel invest. They have often had venture-scale exits, and correspondingly, have more than most lying around in loose change. From these sorts of investor, you can expect capital, introductions to Tier 1 investors, input on strategy, the brokering of commercial opportunities, and more. Sure, they want to participate in your upside, so they’ll take some equity, but they’re generally not very greedy (far less so than, say, a Pre-Seed fund). Frankly, they’re probably doing it for the high. They miss operating, and enjoy the precariousness of startup, vicariously. These guys are rare, but they’re good for up to $250k. It does not take much Googling to identify them. Reaching them, however, is another question entirely.

Cherubs: Uriel, Zadkiel, et al

The next bracket of investors is the most common. These angels typically invest between $10k and $50k. They may not have had venture-scale exits, but they can certainly afford to invest a few tickets at their preferred price point each year. They may well have had an exit or two in the past, or they may be senior in big businesses, often in professional services. Their expectation, especially in the UK, is to enjoy the tax efficiency of early-stage investment in the very rare event that it pays off, and to be fairly hands-off as their investments either do or do not succeed. 

They may volunteer a few useful intros, especially if they work or worked in a world relevant to your business, but in general, they will be fairly dormant. Bringing a few of these together is a great way to get your business off the ground. Some may not have the patience for a full 12-year rollercoaster, and occasionally will sell secondaries as part of future funding rounds (often at Series A, B, and beyond), but if these investors really are “in it” for the long haul, it may be worth syndicating them in an SPV. This can keep your cap table tidy, and limits the operational overhead of managing many relationships. When fundraising, you’ll need to consult your shareholders, and if you have tens of angels to consult and update, it can become cumbersome. 

Bad Actors: Lucipher

This lot cause harm. They remind me of bad parents, and Larkin’s associated poem, This Be The Verse. 

I’ll offer an alternative arrangement:

They fuck you up, the angels bad,

They may not mean to, but they do.

They fill you with the faults they had,

And add some extra, just for you.

But they were fucked up in their turn,

By tools in gilets, caps and brogues,

Who half the time were “GOD, you’re good!”,

And half the time were absent rogues.

Bad experiences are all passed on,

From exits unimpressive to most women and men,

These once-bad founders with shreds of cash

Should never touch start-up again.

The image of the hapless parent inadvertently handing down generations of entrenched mistreatment and neglect is apt. There are swathes of disenfranchised ex-founders, most of whom have a bone to pick with the startup funding ecosystem due to having navigated it so poorly themselves. They come in with a more significant cheque than they should (often, more than they can afford) at the early stages of a business in a space they purport to know well. They feel they have earned the title of ‘domain expert’ (in many cases, they have). They have committed significant capital to the business, and feel well-equipped to help it on its way. 

Pair their financial investment with their “complicated” emotional attachment, and invariably, these angels are pot-committed. In the early days, they may well look and feel helpful. They will know things you don’t (these are lessons you can learn); they will know people you don’t (these are networks you can build); and they will often inject what walks and talks like good governance, by forming a board, which they’ll promptly Chair. Their potential and value is somewhat capped, though. They can’t unlearn the lessons they’ve learned, they don’t feel inclined to bolster a network that has served them as well as they’ve needed it to, and they rarely have the humility to step down from a board, even when investors specifically request it. You will find these guys really hard to manage beyond about the Seed round. And remember: once someone’s on your cap table, it’s bladdy hard to get ‘em off.

I know I’m going a bit HAM on this category. Let me double down: I promise they can make a business unfundable. Not only do VCs hate working with this bunch (they typically know very little about building a venture-scale business. The bad angels, I mean.), but your choice to appoint them to your board can reflect poorly on your ability to identify and recruit top-tier talent.

Take their money, sure, but don’t let them anywhere near the helm. 

Corporate Venture Capital: Myth, or Legend?

Most CVCs are much more C than VC. They invest weirdly. Sometimes, they invest directly off the balance sheet; at other times, they invest from dedicated funds. Sometimes, they invest regularly; at other times, their approach is more ad hoc and opportunistic. Sometimes, their investment thesis is very disciplined; at other times, it looks a bit more scatter-gun. My advice here is to ask them lots of questions.

• When do they invest?
• What do they invest in?
• How much do they invest?
• Do they reup?
• When do they expect returns?
• What sort of liquidity event do they anticipate for your business?

What you’re trying to establish is whether they actually want a venture-scale outcome. In some cases, they claim to, but answers to the above questions will reveal that they are really infiltrating your cap table before launching a coup d’état, giving you a tempting (but premature) exit offer in the medium-term, capping the upside of what could have been a world-changer. 

When done properly, a CVC can be an incredibly powerful force multiplier. I know from experience that Bosch and BMW (inter alia) have excellent CVCs, who introduce portfolio companies to relevant business units, but also help them grow outside the parent organisation. They truly act as CVCs, and want their businesses to grow to IPO. I bet their secret ideal outcomes are to sell to Siemens and Volskwagen respectively, at a 10x revenue multiple.

Either werks.

Grants, and how they’re like Ribena

In the early stages of building a business, you take any version of success. 

Grants come in different shapes and sizes. Some are big, others are small. Some are tied to specific projects, others are more like awards and can be used for n’importe quoi. Important to consider is the following: the characteristics of grant-attractive businesses are very often misaligned with the profile of a business that meets VCs’ expectations. 

Grants encourage Oliver Twistism: a constant coming back for more. In the project-based grant example, they also require pretty singular focus on an individual initiative. Neither of these is good if you want to build a venture-scale business. Oliver Twist would have been a rubbish entrepreneur (thank God he could sing), because the only place you should be asking for “more” from is your target market. “ROI, ROI: never before has software offered more!” it’ll chorus, rightly. 

Continually raising (or even winning) capital is a bit perfunctory unless it leads to something. If you’re consciously burning capital because you’re growing, that’s one thing. If you keep coming back for more capital because you still haven’t figured stuff out, that (eventually) is unfundable. Some founders have strong enough profiles (and possess other misleading externalities) to get away with this for longer than they should, but the truth always prevails. The project-based stuff is bad because it encourages the antithesis of what makes a business venture-scale: “let’s spend lots of time making incremental progress towards this massive, ill-defined problem!” Let’s not. Remember, the things that put and keep you on the venture track are scalability, repeatability, and velocity. You need to get big quick, and efficiently. 

The allure of non-dilutive funding is obvious. Founders absolutely should try to obtain some grant funding. Grants can sometimes introduce really valuable partners, who eventually become valuable customers. But founders should approach grants with caution, and in the knowledge that it’s bad to be pigeonholed a “grant-dependent business”. I wonder how many unicorns the ERDF has backed…

So, where non-dilutive, easily obtainable grant funding may be useful, it’s possible to have too much of a good thing. Sometimes, a bit of dilution is actually preferable. That’s the Ribena bit.

Err, so, what now?

This is a fair question, given that I’ve problematised every major source of startup capital. The conclusion is that you’ll have to pick your poison. For every negative point I’ve made, there are hundreds of positive counterpoints. My essay (maybe ‘article’ is more apt? Even then…) attempts to introduce you to the risks attached to each, and does a bad job of giving the credit that is due to the truly brilliant actors in each category. In Europe, in particular, the great are few and far between, the bad are in a minority, and the majority are fine. I don’t want “fine” for you, and I hope this has helped you see wood from trees.

There is such a thing as repellent capital. Confusingly, it is possible for capital to be:

• Too Passive and Too Active;
  • Dead weight on the cap table not contributing to your evolution versus asking too many questions, hard to manage, needy, distracting
• Too Conservative and Too Aggressive;
  • Aiming for a bronze medal, risk aversion to the fault of capping your upside versus allowing and encouraging an insane burn profile, trying to shove you along the venture track rather than keeping your focus on customers
• Too Myopic and Too Long-Termist;
  • Impatient to exit, encouraging an early M&A versus allowing you too much rope to experiment and R&D yourself into a boring early grave

Beware the fault-truffling VC. Every decision carries an implication, and we’re often “marking negatively”. Simultaneously, I’d encourage you to learn our cynicism. Remember the permanence of inviting someone onto your cap table, and remember, too, that it is just that: an invitation! Your investors are lucky to be part of your journey, especially if it goes well. If it goes badly, oh well. That’s a risk we take knowingly, and one we price in. Don’t cry for us, Argentina.

Building can be exhausting and demoralising. Founders can fall into bad practices like selling off-ICP, offering free trials, and taking money from bad investors. Precisely the reason we do not like to see those bad practices is because we know they are informed by desperation. Discipline in startup is important.

Ultimately, YOU run your business, and always must. YOU set its vision, and always must. It’s so important to have a clear vision for the future, because we pilot fish all have our own target destinations. You’re the shark. You choose. But caveat emptor!