Why, and how, every startup should enjoy the fundraising process

UtrechtInc sat down with Sjoerd Mol and Thomas Mensink to discuss their new book ‘Startup Funding’ and collect some key learning points about fundraising for early-stage startups. The authors shared valuable input about why it’s never too early to read the book and start to learn about investor readiness, as well as what the consequences are of getting too much funding at a too early stage. 

Sjoerd Mol is a partner at Benvalor law firm in Utrecht and co-heads the ‘emerging companies and venture capital practice’. This means that he assists startups with fundraising as well as venture capital investors making investments in companies. “That is my daily job,” Sjoerd says, adding “I have a few side hustles and one of them is writing this book.” 

Sjoerd has written ‘Startup Funding’ together with Thomas Mensink, startup investment analyst at Golden Egg Check. At Golden Egg Check Thomas and his team connect founders to the right investors – and the other way around. “Sometimes we help investors to scout for the most relevant startups in their specific niche and sweet spot,” Thomas clarifies. “We recently launched our own co-investment fund. So now we are also investing in startups.”

How do you know each other?

“That is a good question,” Sjoerd laughs. “We knew about each other’s existence for a while, and at the time I had the idea of writing this book we coincidentally met at the drinks of a startup event.” Thomas continues, “I invited you for the podcast about deal terms, and to this day that is our longest but also most popular podcast.” 

Due to their mutual yet overlapping fields of expertise, they saw an opportunity to bring their knowledge together in a book. “Where Thomas is really an expert in the field of investor readiness, fundraising and how you connect to the right investor, my expertise is more from the moment that there is a term sheet on the table and you have to negotiate the terms.” 

“The devil is in the details.”

Did you learn a lot about each other’s expertise in the process of writing this?

“Definitely,” Sjoerd declares, “I had some experience with the very early phase when a startup is trying to get investor ready, but I learned an awful lot when reading Thomas’ parts of the book.” “The same is true for me,” Thomas continues. “You think you know the legal aspect more or less, but there is so much still that you have to learn when you really dive into it. The devil is in the details, of course, and I think for most startups the legal part is not the most fun – but it is very important. The same goes for me, I kind of knew what a term sheet looked like, but by reading what Sjoerd wrote, I also understand why it looks that way. Why certain decisions are made or how you can balance a term sheet to get a fair deal.”

When is the ideal timing for a startup to read ‘Startup Funding’? 

“We wanted to make sure that the book has a flow, a beginning and an end,” Thomas explains. He says that the beginning represents the stage when founders are considering raising funding. “Because they can already take some steps to be well prepared for fundraising – I think it all starts with the mindset. If you want to set up a company that changes the world, or makes an impact, then probably you will need some funding. And some of the decisions that you make in the early days can affect your capability to raise funding or grow further. You don’t have to read all the parts of the book in the early days – but you can already read the part about investor readiness. And of course, when you are in the process of actually negotiating with investors and having term sheets on the table, then it is really important to dive into that legal part that Sjoerd wrote to understand what the deal is and what the consequences are of signing,” Thomas continues. 

So it’s never too early to read the book?

“Well, maybe you have other priorities in the beginning,” Thomas says. “I can fully understand that it may be better to talk to customers first than to talk to investors. But at the same time, it is never too early to speak with investors to understand the way they think and the type of companies they are looking for. So it’s never too early, but focus on the right things of course.”

“It is never too early to speak with investors to understand the way they think”

What are the most common mistakes that startups make when they start to get investor-ready or start the funding process?

“I see quite often that startups that are not investor ready at all, are approaching a lot of investors at the same time,” Thomas begins. “They think, ‘We might get a no, but if we approach 100 investors, then probably someone will say yes. All we need is one yes.’ That is not how it works. A lot of investors will look if there is a match with the sector, the tech domain, the stage, the funding they need, and also the traction. If you don’t have any traction, you cannot show that there is market demand which means that many investors will then say that you are too early for them. And then you are wasting quite a lot of valuable time. In that situation, a startup should be talking to customers before they talk to investors. At least if you are serious about growing and setting up your company. Sjoerd probably sees more mistakes later on.”

“Yes, I see a lot of mistakes later on,” Sjoerd fills in. He says that he often comes across startups that are not well prepared, and that don’t understand important legal terms when they are already in discussions with investors. “They end up signing a term sheet without consulting at least one real expert in the field. After that, they come to me and ask me to write the proper documentation, but then they are obviously far too late to really negotiate the main terms of the deal. So, one of the mistakes startups make is that they think it is getting legally interesting only after signing the term sheet,” Sjoerd declares. He sums up that “It is really good to start preparing well for talks with investors and to read up on all the legal terms. This means that you know what you are signing and negotiating, on which items you can push back and which are more or less standard, so that you can avoid a situation where you are already signed up for something that is really bad.”

“One of the mistakes startups make is that they think it is getting legally interesting only after signing the term sheet.”

Would you recommend most startups to consult a legal advisor?

Sjoerd continues “Yes, as long as it is not the legal advisor of the investor. Because that also sometimes happens,” he adds laughing. “But you’re right, that is definitely the advice and of course, lawyers are expensive so I understand the hesitance to do that. But, if you can, make deals with venture capital lawyers as a startup. If you are part of UtrechtInc, for example, there are deals with associated law firms. So, there are other ways to get good advice for affordable prices.”

What trends have you seen in the Dutch market in the last period in terms of funding?

These types of trends are measured at the Golden Egg Check, Thomas says. Since they started analysing the trends, there has been a new funding record each year, even in 2020 when corona hit. He explains that if you take a deeper look, you see that “the biggest explanation of why the total sum of funding increased, is because there were more and larger later-stage rounds. If you look at early-stage funding, not so much has changed in the number of deals, the total amount and the average are more or less the same as before”. Thomas continues, “At the same time, we see more competition between investors. There is more interest from foreign investors, from the USA for example. But also more and larger Dutch funds are coming.” 

“We see more competition between investors.”

If you compare the Netherlands to the rest of Europe, is it easier or more difficult to secure early-stage funding here?

“I am not perfectly aware of what is going on in other countries,” Thomas says, “but my impression would be that the Dutch market is indeed quite tough for an early-stage startup. If you are not a serial founder or have any traction yet, it is super hard. Most Dutch VCs are relatively small, but still, invest only when there is already some traction. I call that ‘the Dutch VC-paradox’. That means that only when you hit a certain milestone in terms of traction, you will be able to find investors. Because Dutch investors don’t look so much at vision – but traction. The risk-reward game here is a bit different than many other VCs and that’s perhaps why not a lot of Dutch unicorns have a lot of Dutch VCs on board.”

“Dutch investors don’t look so much at vision – but traction.”

Can an early-stage startup receive too much funding?

“Yes, they can,” Sjoerd replies directly. “If you have too much funding you make the wrong decisions, you will spend your money too easily and you will lose focus.” Thomas adds by highlighting the risks of getting a very high valuation after receiving ‘too much’ funding at an early stage, explaining that “If you then want to raise another round, maybe 2-3 years from now, and you don’t have a higher or even the same valuation, it does not put the founder in a very strong position as it appears that you could not live up to the expectations of that super high valuation.”

“I am a believer in capital efficiency,” Thomas continues. “If companies can create miracles with limited money, I think it says something about the viability of their business model and how well they know and understand what they are doing instead of just experimenting and seeing what sticks.”

“If you have too much funding you make the wrong decisions.”

Any final tips for startup founders?

Thomas begins by saying that “My tip would be to speak with other founders that have some experience in seeking funding. I think it is very interesting to learn how they did it. Maybe leverage some of their network that they have built? Maybe they can introduce you to their investors? I am also a big fan of peer-to-peer learning and interactions, which is very important. You can do that for fundraising, for go-to-market strategies, for hiring, for basically everything! But it is especially important when it comes to fundraising.” He continues by underlining that peer-to-peer learning can connect you to other founders as well as investors, and prevent you from making some mistakes. He recommends anyone who is in discussions with investors to speak with other companies they have already invested in, to learn more about how the investor actually works. What do they do to support your business in good and bad times? Will they have your back?

Sjoerd adds that “One final thought from my side is to make fundraising a fun period, a fun phase of your startup. Quite some startups are not envying reading term sheets and discussing terms with VCs, but actually, it really is fun.” Thomas laughs and concludes “Fundraising is fun.”

“Fundraising is fun.”

“It is about mindset,” Sjoerd continues. “Start the process with an open mind and try to see the good things of it – and there are many good things. For example, the feedback that you will get from investors will help you enormously in your own business. And also just going through a proper due diligence and the whole process with the VC will no doubt strengthen your company and your team. So enjoy it!”

Do you want to read ‘Startup Funding’? Buy it here today!