Article:

Surviving the early-stage epidemic

09 December 2020

Lior Shahar, Partner, Head of High Tech and IPO's sector, Technology & Global Cluster, BDO ISRAEL |

Beneath the record-breaking investment numbers for 2020 hides a depressing reality for early stage entrepreneurs. Raising seed money during a crisis is challenging but doable –here are a few tips on how to improve your chances of getting funded.

On the surface, it looks like the Israeli investment scene has shrugged off the Covid-19 effect: according to the latest IVC-ZAG Tech Funding Report, in the first 3 quarters of 2020 Israeli start up raised more than $7.5b, compared with $5.9b in the same period last year. Considering the fact that only $400m in new investments in the 4th quarter of 2020 would get us to the total amount invested in 2019 – 2020 looks like another record-breaking year in terms of investments.

 

But don't let these impressive numbers fool you, as all is not well in the kingdom of start ups. Only 92 companies raised seed money in the first three quarters of 2020, compared with 234 seed rounds in all of 2019, 209 in 2018 and 211 in 2017. The median investment in seed rounds decreased by 80% in the first three quarters of 2020 compared with the numbers we recorded in 2019 and 2018. In other words – 2020 is shaping up to be the worst year for external seed funding since 2014.

There are several reasons for this trend, but they should be discussed separately. Right now, let's be practical, and figure out what can early-stage entrepreneurs do to increase their chances of raising external funding.

  1. Non-dilutive support – There are several options for funding your work which will not force you into giving away equity, and can provide some more time to work on your "official" seed round. The most notable are the Israeli Innovation Authority's various grant programs, but you can also participate in an accelerator cohort which provides some valuable perks for its start ups such as cloud credits, experts office hours, etc. Participating in a "challenge" competition, usually arranged by a multinational company or a local enterprise might seem like a great way to get both funding and access to your first customer, but it also carries the risk of losing focus of your goals– so try to get as much information from past "winners" on their experience before you make a decision.
     
  2. Divide and conquer – If you "need" $1m as your seed investment, divide it into 2 or even 3 tranches of $200k-$400k, with variable increasing valuation for your company. This will enable you to start working as soon as you have the initial funding, using it to reach the milestone needed for the next tranche, and be flexible enough to change your target amount and/or valuation if things are progressing better or worse than you planned.
     
  3. Think like an investor – In the same way you need to understand what your customer or user needs and would bring them value, you need to understand what an investor needs and would bring them (long-term) value. Show how you are building a company which would constantly evolve and find new opportunities in the future, but don't forget that you need to show how this company will manage to sell its first product now. Ask yourself what would convince you to give away your own money to someone, and turn these insights into the right data points and answers you would present to an investor – and use these insights to chart the best way to find investors. For example, if you would only give money to someone who came through a mutual trusted friend– try to find someone who can connect you to the investor. If you only trust market sizing you conduct yourself and don't believe any chart someone found on an unknown website – spend as much time as needed to build a market sizing methodology and outcome which you can fully explain and defend when asked. To put it bluntly – think of the investor's money as your own money being risked, so be as meticulous and judgmental when preparing your pitch as if you would have been trying to raise money from yourself.
     
  4. Be realistic – this is a general advice but it is also the most important one. Consider the possibility that the fundraising process would take more time than you expected. Understand that investors are being bombarded with offers and might not have the patience or motive to spend more than 30 seconds on your one-pager. Know that one entrepreneur's experience with a specific investor is only an anecdote, so filter the data you get from this entrepreneur from their personal feelings and their company's specific situation. Investors like to say that the best companies were born during a crisis, but you should really understand what they're not saying, and what is usually neglected in each hindsight success story – more companies fail than succeed, so you need to work hard to prove your company has a better chance to be the best company, if you want someone to help you become the best company.

 

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