Fair could tap up to $3.86bn in debt with Series B funds
|Christopher DeLuca||Feb 14, 2019|
PD Reporter aims to be the go-to place where early-stage startups go to kick off their capital raise process. Founders can announce some of the high-level details of what they're looking for to a growing audience of early-stage investors, making the process slightly easier for founders and investors. Post capital raise, founders can draw interest from investors for their next round.
Was this forwarded to you? Please sign up here.
Trends to look out for in this week’s newsletter
Subscriptions are eating the world
Put simply, more and more of us are living modern life on our phones. The subscription business model that's predominant for music, movies, shopping and pretty much everything else we do is starting to bleed into all other parts of modern life.
User-centric design when the user is your dog
Amazon is causing massive disruption in the pet industry and they are putting together the building blocks to not just sell products to pet parents, but enable pets to be participants in a connected home.
The PetTech gap
There is a major gap between friends and family funding and VC or industry investment. The pet industry is mainly NO tech, so strategic investors in the industry don’t “get” how returns work with tech companies… There are a lot of interesting PetTech companies stuck at the seed stage, with little to no revenue who could be disruptive if there was a fund focused on seed stage PetTech.
Questions that you should respond to:
If the benchmark for Series A is typically 100k MRR, how do investors value crypto startups?
Is AI underhyped or overhyped?
Future Funding Rounds 🔮
EryDel, a Milan-based biotech company, is currently engaged in talks with investors regarding a crossover/mezzanine round of equity. The company does not know who a lead investor might be, but it’s targeting crossover investors, who are typically active in multiple segments of investing, from private companies that are pre-IPO, like Erydel, and through and after the IPO. The company expects existing investors to participate in future rounds of financing. The last equity round was led by Sofinnova Partners. Since 2008 the company has raised over €50M in equity capital, grant funding and tax credits. Capital raised from the round would be used to complete the FDA/EMEA applications for the lead clinical program in AT, advance the company’s platform and pipeline for additional indications of use, and prepare to prepare EryDel for commercial launch, as early as 2021.
Recent Startup Funding Announcements 💰
Fair spoke with 100s of potential investors for its recent $386M Series B round. The company will look to use capital to ensure it has a strong balance sheet in order to tap into institutional debt. Fair’s model allows it to raise $8-$10 of debt for every dollar of equity raised. To date, the company has raised in excess of $500M.
Samuel Knight International took 9 months to a raise an undisclosed amount from Gresham House Ventures. The company spoke with 4 potential investors and received 3 term sheets. SKI first met its lead investor 18 months ago. The amount of capital raised was a significant amount breaking into the millions.
4Gene took 7 months to raise a “7-digit” seed round, receiving 1 term sheet. Total amount raised in the seed round was below $5M. The company spoke with approximately 25 potential investors. Valuation after the round was between $1M-$10M. 4Gene knew the lead investor for 4 years prior to the close of the round.
PupPod knew its lead investor for a little over 1 year before raising its $772K seed round.
Avora received a very high multiple of revenue for its valuation in its recent £5.1M Series A round. The company knew the lead investor for 3 months prior. Avora has raised a total of $10.5M to date.
Fair (Scott Painter, CEO and Founder)
Fair, a Santa Monica-based car-as-a-service provider, closed a $386M in Series B round back in December.
Recommended rule to live by: One of the primary management rules I live by is to narrow my direct reports to less than five people. Your business is not a legislative body. It should be designed for simplicity and moving ideas and actions effectively up and down a distinct leadership chain. Delegating everything you need to solve for in your business through just those five allows you to solve problems sequentially, and is also a healthy way to compartmentalize your stress. If you need to manage your business through more than five people on a given day, it’s a sign that your company is probably not organized as efficiently as it could be.
Recommended book: The Innovator’s Dilemma. It talks about the real issues you have to sort through when breaking a system in order to get to the other side. If you’re going to be a true disruptor, you can’t simply retrofit off-the-shelf solutions and old-school thinking by an incremental improvement. It takes root-level reinvention—the kind a lot of entrepreneurs frankly don’t want to take on.
Thoughts on work-life balance: I’ve lived on both ends of this, for sure. Historically, I’ve failed at it. I know some entrepreneurs claim to be masters at managing this balance; frankly, I’m not sure I believe them. For me, starting a company is such an all-consuming endeavor that its natural tendency is to eat your life. I have to take very active and deliberate steps to carve an existence outside of the thing I’m trying to build. And unfortunately, the solution I’ve come up with is an expensive one: I bought a boat. Not only does the sunken cost literally force you to go on vacation, but if you’ve got four kids you love unconditionally like I do it creates a ready-made environment for connecting with them. There’s literally no better way to spend really valuable time together than living together on a boat for a week.
How long did the round take to close: I think one of the misconceptions most founders have around fundraising is that it’s something they do only when they need money. The arc of company-building demands that fundraising is a core competency you’re focused on at all times. It wouldn't be fair to say that we devote a dedicated period of time to fundraising. We're always thinking about fundraising and the fundability of the business so that we can grow it. A healthy, growing company is always immediately capable of having a fundraising or financing conversation.
How many firms did you speak with: The fact is, you're never going to raise real venture capital or funding in less than three to six months. Depending on how much money you're raising, investors always need at least that long to consider an investment. It takes longer to raise more money because you have more due diligence and more questions, but if you're an entrepreneur who’s thinking it should go faster than that, you're delusional. It's a process, so you just have to buckle up and ride it out. Besides, one of the greatest parts about fundraising is you get to go and test your thesis, business model and what you're doing with the smartest people in the world for free. The ones who like what you're doing end up investing, while the ones who don't tell you why. Fundraising gives you really good insights into how to grow and pivot and change the business to make it more attractive. You shouldn’t want to rush that; you should be learning from it the whole way.
What capital will be used for: We actually don’t like to spend equity capital on operations and marketing. Rather, we use it to make sure we have a strong balance sheet that enables us to tap into institutional debt, which is a multiplier effect for our business. In general, our model allows us to raise $8-$10 dollars of debt for every dollar of equity raised.
Comment of valuation after the round: I don’t have specific comment about our valuation. But when you raise money, you’re generally selling somewhere between 10 and 40 percent of the business—with the average closer to 20 to 25 percent. Given that our latest funding round totaled $386M, that math puts us in a pretty great category.
Number of investor conversations and terms sheets: We spoke to hundreds of potential investors. Raising capital is a numbers game; it doesn't matter who you are. Even the most successful companies speak to at least that many investors for every dollar they take in. After all, you never want to be in a negotiation where you have no alternatives. The more term sheets and more alternative investors you have, the better your evaluation in terms will be factually. In the end, we ended up with 10 different investors who truly believe in us and what we’re trying to do.
Seems as though the process of raising money isn’t efficient. Your thoughts:
Length of relationship with lead investor: I don’t have an exact timeline, but we were definitely lucky to have had the time to develop a well-established relationship prior to the investment.
Total amount raised to date: We’ve raised more than $500 million of equity capital overall. Given how our business model works, that unlocks between $8 to $10 of debt for every dollar of equity raised.
Competitive landscape: We're probably most competitive with the status quo. In short, we don’t think people should subject themselves to the long-term debt and commitment of a traditional lease or auto loan—two outdated consumer options that haven’t faced innovation since their inception. That said, the mobility space is one of the most dynamic and transformational spaces in business today. So while we may not be seeing any pure-play competition, any model looking to get people from Point A to Point B is effectively competing for mind share with us.
Macro trends: Put simply, more and more of us are living modern life on our phones. The subscription business model that's predominant for music, movies, shopping and pretty much everything else we do is starting to bleed into all other parts of modern life. Certainly, we’re seeing a trend away from ownership and toward subscription-based services— and this is just as true in the mobility space. I think that truly great companies should be focused on solving a real problem—and there’s no bigger consumer problem than the process of buying and owning a car. It’s one of the most time-consuming, frustrating, high-anxiety complex tasks that we all have to face in modern life. And until that's resolved, we see a massive opportunity to address that problem.
Samuel Knight International (Steven Rawlingson, CEO)
Samuel Knight International, a Newcastle, UK-based recruitment and project man-power company, received investment from Gresham House Ventures last month.
Recommended rule to live by: Work as a team, don’t hire on skills hire on DNA and create a shared vision where everyone is rowing in the same direction.
Recommended book: Verne Harnish - Scaling Up.
Thoughts on work-life balance: Of course It’s important to find the right balance. We all work hard but do make sure we spend time with our friends and family, we offer flexitime and have a very open leadership style where no one is micro managed if people want to work from home that’s fine. This all comes down to the culture I’ve created.
How long did the round take to close: It took 9 months in total to raise the funds and recapitalize and get the business investment ready.
Number of investor conversations and terms sheets: We spoke to around 4 potential investors with three term sheets submitted, we knew what we wanted from our partner and we believe we achieved that with Gresham House.
What capital will be used for: Technology improvements, more staff, international launch in the US, working capital.
Seems as though the process of raising money isn’t efficient. Your thoughts: I personally think it depends on the business and the foundations it’s been built on, i.e. we had a seed investor and lack of control and processes for the first 2 years so spent a lot of time cleaning up the way I set the company up
Length of relationship with lead investor: I first met Steve Cordiner 18 months before the investment.
Total amount raised to date: Prefer not to say but it was a significant investment breaking the millions.
Macro trends: AI will play a big part our market, we will capitalise on this by developing our own internal AI systems to allow us to be more efficient and productive with the projects we work on.
4Gene (Heimo Adamski, CEO)
4Gene, a Heilbronn, Germany-based developer of activatable flavor and fragrance precursors for cosmetics, food and industrial fragrance warning systems, raised a 7-digit seed funding round last month.
Recommended rule to live by: Rule #1 is to focus on your key strength and therefore on your main target market. Especially in our case, working with scent and taste molecules, it is so easy to get lost in the wide variety of possible applications.
Rule #2 talk to possible Investors as early as possible, even if you might think it is not the the right time yet. They will understand your situation and will be experienced enough to judge the situation properly.
Recommended book: Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld and Jason Mendelson.
Thoughts on work-life balance: Speaking for our team: we love what we do and therefore we do not perceive this as work. Still we have given ourselves one day off per week. When it comes to Employees who are not Co-Founders, you definitely have to have a plan for such thing as Work-Life Balance.
How many firms did you speak with: In total we have spoken to approx. 25 investors to get the best understanding how they are different in their expectations. We then have selected four Investors to build a Consortium that fits our needs and their expectations. With those we have negotiated a Term Sheet. The final process was pretty smooth and fast. My advice would be: Keep the Driver´s seat and manage the process. Never give up the control and manage the pressure. This makes life a lot easier.
What capital will be used for: We have a financial plan that gives us room to invest in Laboratory and Production machinery as well as People, Regulatory and Market Entry activities.
Comment of valuation after the round: Between $1M-$10M.
Number of investor conversations and terms sheets: We started as a funded project a the Technical University in Munich, Germany. Many Investors in Germany are tracking these funded teams from the very beginning. We had contacts to Investors for about 3 Years before we seriously started to negotiate, which finally took us 7 months to receive to a term sheet. Then everything went quick and easy. The total time spent on this is also dependent on the number of Investors you would like to include in the seed round.
Seems as though the process of raising money isn’t efficient. Your thoughts: I would say it is part of your business day for 6-9 month, but it does not keep you busy all day long for such a long period. The last week before the term sheet is a bit more demanding, but still manageable.
Length of relationship with lead investor: We knew the lead investor for almost 4 years.
Total amount raised to date: The total amount raised in this seed round is below $5M.
Macro trends: Sustainability in a broad sense will be the next big thing that chemical companies need to much stronger focus on. In all market segments the “natural” products are almost a requirement with strong tendency to still very much increase.
PupPod (Erick Eidus, CEO)
PupPod, a Seattle-based provider of smart products for animals, closed a $772K seed round last month.
Recommended rule to live by: Our guiding principle is to spend the least amount of money and time to figure out where we are wrong.
Recommended book: Getting to Yes.
Thoughts on work-life balance: We focus on deliverables and schedule rather than micro managing when the work gets done. We work in a distributed fashion.
How long did the round take to close: July and Aug were spent getting organized for the Labor Day to Thanksgiving window.
What capital will be used for: We are focused on building v2 of our product to address lots we’ve learned from v1.
Number of investor conversations and terms sheets: Lots. It was a trial and error process with random angels, angel groups, VCs, PE, and strategic investors. The process was very inefficient, but unfortunately normal. Listen to this podcast that explains why entrepreneurs hear “no”. It often has nothing to do with the validity of their idea, but rather the white space that investors can’t process.
Seems as though the process of raising money isn’t efficient. Your thoughts: The PetTech sector has a particular problem right now. There is a major gap between friends and family funding and VC or industry investment. The pet industry is mainly NO tech, so strategic investors in the industry don’t “get” how returns work with tech companies. They are used to evaluating the ROI on consumables, like food or treats. Angle investors think PetTech is cool, but they don’t understand the pet industry, so they are looking for a VC or strategic investor to follow. VCs are looking for $1M-$10M annual revenue stream.
There are a lot of interesting PetTech companies stuck at the seed stage, with little to no revenue who could be disruptive if there was a fund focused on seed stage PetTech. The PetTech companies getting significant investment had personal connections getting them through this gap.
I was at a conference called Pets and Money in Austin in early Dec. and the gap was glaring. Start-ups looking for seed round funding and PE/VC/strategic investors who are looking to invest in growth rounds.
Length of relationship with lead investor: A little more than a year.
Competitive landscape: Pet parents want to play with their pet remotely and leverage technology to make their life easier and their pets life better. PupPod is at the intersection of smart devices, connected homes, IoT, and pets as family members. Amazon is causing massive disruption in the pet industry and they are putting together the building blocks to not just sell products to pet parents, but enable pets to be participants in a connected home. But this requires designing and building hardware / software user experiences FOR animals, not just humans. This is a non-trivial problem. Lots of people talk about user centric design, but you have to question lots of assumptions about design when your user is a different species. That’s one dimension that makes PupPod unique.
Over the next decade, there will be 3-4 platforms for connecting humans and animals and PupPod is poised to be one of those platforms.
Avora (Ricky Thomas, CEO)
Avora, a London-based enterprise analytics platform powered by native machine learning technology, secured £5.1m in a Series A round last month.
Recommended rule to live by: Where you can, let technology do the heavy lifting. If you can automate laborious tasks, you free your employees up to be more productive and creative.
Don’t be content with finding an issue within your organisation, get to the root cause of why it’s happening. That insight allows you to take action and improve the business moving forward.
Recommended book: The Hard Thing About Hard Things.
Thoughts on work-life balance: Work-life balance is important but equally, as the CEO of a fast-growing business and market leader, you have to be realistic. The early stages are a hard graft, but it takes that monumental effort upfront to get the snowball moving. It’s by no means easy after that tipping point, but you can certainly scale in a more balanced way.
Having said that, family should always come first. As someone who has been divorced before, I learned this the hard way. But from that learning you grow, and now I build certainties into a predictable schedule – a fixed time when I take our daughter to nursery and when I will be home for dinner. It helps you stay grounded and of course, you need a supportive and understanding partner to help you manage the balance.
How long did the round take to close: We really took our time over a number of months, deliberating and making sure that we partnered with the right investors that understood our vision and mission.
How many firms did you speak with:
What capital will be used for: We will use the funds raised to expand our leadership and sales teams, launch in the US market and continue to invest in our core technology, in-platform machine learning and augmented intelligence. The financing will also pave the way for the development of an app marketplace to enable our customers to build their own solutions on top of our platform.
Comment of valuation after the round: We received a very high multiple of revenue to reflect our growth.
Seems as though the process of raising money isn’t efficient. Your thoughts: There are some key principles to bear in mind when you’re looking to raise VC as effectively as possible.
Be pragmatic, set the parameters and invest your time wisely – you don’t need to attend every meeting, join every call or reply to every email from every associate at every VC. Work out where you are needed, where you can have the most impact, and apply you time there. The very first call, for example, you should be setting the parameters and qualifying them out of your funding round. Ask questions about typical investment stage, how much added revenue is required over how many quarters, what industries, what is the approval process, the minimum deal size and so on. Also, don’t get sucked into believing the initial hype in those first few meetings, of how much they may or may not love your business. You could easily find yourself disappointed when they lose interest overnight, and worse, you may have wasted time not talking to other potential investors.
Be prepared - Get hold of a due diligence checklist and have the documents ready. Spend more time than you think is necessary on the term sheet, to ensure the subsequent process is simple.
Quality over quantity – Focus on the content of the investment deck instead of wasting time worrying about the aesthetics. Make sure it accurately and succinctly tells the story of where you are as a business and where you will be.
Timing and competition - Only raise money when your metrics are optimal. This could mean raising funds before you need it but before you allow risk to creep in. When you do decide to move forward, make sure you create a competitive environment, as this will speed the process up.
Length of relationship with lead investor: Three months.
Total amount raised to date: $10.5M.
Competitive landscape: There are many companies out there that do various parts of what we do – from Datorama, to Domo, Looker or Tableau, but none of them does everything. Lots of traditional business intelligence or data analysis vendors can tell you what’s happening in your business, but AVORA tells you why it’s happening, as it happens. We get under the skin of your business like no-one else – using embedded machine learning – to get to the root cause of changes and provide the insight that you need to instantly act on it.
Macro trends: There has been a lot of hype around artificial intelligence - many of its underlying techniques are at the top of the "Gartner hype cycle" where we've witnessed inflated expectations and the risk of disillusionment, as users better understand the limits of these approaches.
But AVORA is poised to take advantage of the new evolution of “AI” – augmented intelligence. Users will be looking for providers and solutions that will actively help them better understand their data in real-time and why something is happening within their business so that they are able to do something about it - in seconds or minutes, rather than in days and weeks.