On startups and VC in Berlin, Europe and elsewhere

Founders typically ask how long a standard VC process takes. Unfortunately the answer is what you would typically hear from a lawyer ‘it depends’. It can be as fast as a few weeks, or it can take months. It can take a long time to get an initial decision or a termsheet, but after that it can go smoothly. But it can also be the exact opposite - quick termsheet and then some troubles down the road - it depends on the investor, but also to a large extent on the company.

I thought about this, because we signed our latest investment in Berlin last week (a few hundred k seed deal). It was almost exactly 2 months after the first introductory call I had with the founders. It probably is not the quickest process we have had, but certainly there were many that took longer.

The most important thing about financing/M&A processes: it is never done until it’s done (i.e. until you sign the docs / the money hits the bank account) and things can change in the last minute, no matter what parties promise to each other. I do not mean that we like changing our mind in the last moment - we try hard to always have a deal once a handshake agreement has been reached or a termsheet signed - and I think we have been pretty good at succeeding here so far. But there are different folks and standard operating procedures out there and things do not always work out as intended. Some investors may prefer to sign a termsheet first and only then start thinking more seriously about the business (more typical of late stage/private equity), some investors (or potential buyers for that matter) can have an investment committee / controlling owner that can kill deals after a lot of work has been done, people can change their mind based on some new facts, markets can crash… And we are not always on the investor side of things in these situations - in a follow-on investment situation we are frequently working with the founders to close the round with a new investor, so that my experience is based on having been on both sides of the table.

In my experience, there are two things that founders can do to speed things up:

- create competitive pressure. nothing speeds up investors as the feeling that there are others out there ready to do the deal any second.

- own and drive the process, follow up, co-ordinate things, set-up meetings/calls, make sure everyone has the right information. do not rely on the investor driving the process to the end.

I also have two anecdotal rules of thumb for how long a process typically takes:

-  depending on maturity of the business: the later stage it gets, the longer it takes.

- depending on jurisdiction: the further east you go (starting in the US, ending in Moscow), the longer it takes, because there are fewer established standards and more legal ‘re-inventing’ the wheel is involved.

If you want to challenge any of the above, have different (or similar) experiences, please comment below!

[Pic found here]

Entrepreneurs, especially the younger ones and especially in Europe, frequently complain about VCs moving slow once approached for funding, about decisions (including a simple “no, thank you, I am not interested”) taking forever and in general about getting VCs attention being a challenge. I think it is a valid complain and the reason for this is that many VCs get approached by many more companies than they can handle - and it does not have to mean that VCs can get arrogant because they get to see so many interesting opportunities to invest, it sometimes simply means that they are not so great at handling and prioritising deal-flow. That is why it is crucial for entrepreneurs to be very thoughtful about how they frame their initial approach to VCs to get their attention and get into a meaningful discussion quickly.

I wrote and said a couple of times (for example here) that it is best to approach VCs via common friends and that such an intro always beats a cold approach and increases the chances of getting VCs’ attention. I argued that this way of getting in touch has become easier in recent years as our social networks have become increasingly transparent thanks to the likes of linkedin, xing or facebook which make it easy to identify these common friends or business contacts.

Whereas I do believe this is the best way of approaching VCs, I want to make clear that it certainly is not the only way that works and makes VCs respond fast. If you do not find people who can introduce you to a VC (or if these people ask for money or a big stake in your company for doing that - this happens as well!) - you should of course approach VCs directly. Just make sure you do it right. I have been thinking about this for some time and was not sure how to best phrase it, but I figured it out recently. The magic word is ‘CONTEXT’!

When you approach a VC you have not met previously, creating the right context for the approach is key to getting his or her attention fast. And a warm social recommendation is a great context - it signals that the person making the introduction trusts and implicitly recommends (to some extent) the person being introduced - otherwise the introduction would not be made. But there are other ways of generating context which can be powerful as well. Here are four ideas:

1. VCs will sometimes be very public and specific about what companies they are looking to fund. For example, my partner at Point Nine, Christoph Janz, wrote a blog post about what companies Point Nine is looking for. If you are working on stuff that addresses a specific problem or area that the VC signalled that he is interested in - refer to that while approaching the VC and you will have a great context that is guaranteed to grab the attention fast.

2. Research what area/stage etc. the VC is focused on, draw conclusions from your research and refer to that when you address the VC. For example, Point Nine has invested in many SaaS startups, we frequently mention that we are focused on SaaS and it is one of, if not THE key focus area for us - I believe it is reasonably easy to find out. So if you are working on a SaaS startup, or a startup that has some SaaS elements - mention as soon in the conversation as possible that this is the case and that you believe it is a good fit for Point Nine, because you think we like SaaS. To us it communicates immediately that you are in our field of interest and signals that you took your time to understand which VC can be a good fit - great context!

3. Another good idea can be to refer to a specific investment a VC has made previously that is relevant for what you are doing. You can refer to a specific company an investor invested in earlier, explain how it relates to your project and why you think it might thus be interesting to the investor.

4. Having met a VC briefly at a conference, having heard him speak to others or on a panel, or having read his blog post feel free to refer to these things thus creating a context for the initial exchange of ideas.

There probably are many more ideas out there for providing context. I am sure that with some research you can generate a context for this first email you send out to an investor that will make him move and engage into a discussion quickly. And, by the way, we are trying to do the same when we approach companies to check whether they are interesting in discussing investment.

I would not like to come across as arrogant with this post and suggest that VCs get to see so much stuff that most startups are not worth their attention. In fact, we are doing our best to respond to everyone reaching out to us in a timely matter in order to be fair and become known for doing so, but I know that we sometimes fail at that too. However, I do witness how the way startups approach investors is frequently far away from ideal and that it can be done much better through adding some meaningful context. 

P.S. For more general ideas on approaching VCs / Point Nine you can refer to a blog post recently written by Nicolas, our Associate at Point Nine.

[the pic in the top comes from here]