are down rounds the path to startup survival?
#135
Howdy,
Welcome to Sunday CET, this edition is packed - let’s get to it.
Dragos
Observations
Here’s what Niklas Zennström, founder at Atomico, had to say the other day:
The problem we have [in the Euro VC funding environment] is that a combination of misplaced embarrassment [about down rounds] and blind hope that the situation will change is preventing founders from raising at all. That means these founders stop building, and technology stops being developed. This could stop some amazing technologies in their tracks if we don’t kill the stigma.
Is not doing down rounds a problem of new tech not being further built or really just of investors losing money? The problem of the current environment is not the down rounds or lack thereof - at least not for founders. It is rather the investors not accepting lower valuations in a down round than the founders deciding to kill their business.
Nothing prevents startups to raise bridges but truth is nobody will give them money easily. Embarrassment to raise at lower valuations? Some founders shy to ask money knowing investors will lose from a lower valuation, perhaps? Nah, hard to believe. When you sit on a once-in-a-lifetime opportunity to build something meaningful for the rest of your life, you’d do anything to put the boat on the right course. Shyness is not in your vocabulary.
Listen, most of the today’s over-valued startups in Europe were built by first-time founders who blindly listened to their investors to spend on unprofitable growth with the hope of selling fast to the next sucker. Make no mistake, the money deployment frenzy from last year was not about building great startups or technology or make Europe sovereign (LOL) - but about getting everybody rich asap.
Now that the markets have turned and investors changed narratives, the really hard question for founders is not whether they should take down rounds or not, but to reset the above-mentioned unhealthy growth paradigm and finally get to building a profitable mechanism, which they should have done in the first place. It’s survival of the fittest and during the hey-day market nobody told them what’s that like, because nobody cared.
A profitable model is out of everybody’s comfort zone and it’s easier said than done. A) They have to imagine that profitable mechanism and B) transition to that new equilibrium by cost cutting, laying people off etc, and getting to healthy economics as soon as possible. You either do that or you hit the wall and close down - that is the drama for the founders, it is a tough situation, first time they encounter it in their lives, and guess what, they’re all in it alone.
A down round is not an out, it’s just buying some more time to figure things out. The discussion for one may or may not come afterwards and it is only available for just a selected few, if that. Outside investors won’t touch anything that doesn't have at least a worse case scenario of a healthy op lined up on a 36-48 months spreadsheet budget. Let’s be real, they’re after growth year over year, not after profitable businesses - even if the markets are stagnant, startups still need to show growth to justify VC funding. Inside investors - the ones who were super friendly bidding high on the company in 2021, now are ghosting founders and doing triage, and are unlikely to contribute to a bridge round unless you score high on their survival portfolio boards. Again, VCs allocate money for extraordinary growth not for surviving anyways and it is safe to assume that you won’t make the cut - you are just a number in a portfolio spreadsheet, and investors are likely to wait and write you off when/if you close business, rather than putting more money on a moribund and haircutting their portfolio value as a consequence.
That is why down rounds have less to do with founders embarrassment asking to be saved and are more of a investors’ pragmatic calculation of a portfolio performance over helping startup founders out. It ain’t personal, it never was - it’s just business.
Interesting Euro deals
🇸🇪 Teenage Engineering*, bootstrapped manufacturer of music synthesizers, raised a growth funding round.
🇨🇭 Ydentity, developing an alternative NFT identity document based on video emotion recognition, raised $1 million seed.
🇬🇧 Eden Bio, biotech startup using machine learning to increase protein yield, raised $1.2 million pre-seed.
🇬🇧 Thallo, using blockchain technology to build a carbon exchange marketplace, raised $2.5 million seed.
🇫🇷 Unagi, building a Web3 sports game platform, raised $4 million.
🇨🇿 Supernova, operating a marketplace platform that connects to popular design editors and interprets design systems into data, raised a $4.8 million seed extension.
🇳🇱 Cradle, another startup helping biologists design improved proteins using ML, raised $5.7 million seed.
🇮🇱 TheGist, generative AI startup doing personalized summaries of Slack discussions, raised $7 million in pre-seed funding.
🇫🇷 Hummink, developing new nanoscale additive manufacturing technology, raised $5.2 million series A.
🇮🇹 Zerynth, selling an end-to-end IoT toolchain, raised $5.5 million series A.
🇩🇪 EngFlow, developing a framework helping developers compile code faster, raised $18 million series A.
🇫🇷 MadKudu, developing a predictive lead scoring solution, raised also $18 million series A.
*Ohanian was sold by a product design detail.
Source: N9
Fresh powder
🇸🇪 EQT Ventures (€1.1 billion)
🇫🇷 SE Ventures (€500 million)
🇬🇧 Index Ventures ($300 million)
🇩🇪 Vsquared Ventures ($165 million)
🇮🇹 Large Ventures (€150 million)
🇬🇧 LeadBlock Partners ($150 million)
🇩🇪 Golding Capital Partners (€75 million)
🇬🇧 Simplyhealth Ventures (£60 million)
🇸🇪 Round2 Capital (€62 million)
🇧🇬 Invenio Partners (€55 million)
🇪🇸 Inveready (€50 million)
🇨🇭 EquityPitcher (CHF 45 million)
🇺🇦 GR Capital (€30 million)
🇸🇪 Behold Ventures (€25 million)
🇮🇹 Unruly Ventures (€18 million)
🇩🇰 Robotic Startups Fund ($2.5 million)
🇫🇮 Wave Ventures (€2 million)
🇸🇪 Node VC
———
TOTAL: $2.8 billion - not too bad, huh? Will this money be allocated to down rounds, you think?
More intel bits
✍️ Also notable:
EQT Ventures, Makers Fund and David Helgason exited from Germany’s Popcore, flipped to a Turkey-based Zynga subsidiary.
Seedcamp and high profile American angels such as Mark Cuban, Biz Stone and Craig Newmark, exited from London-based Factmata, sold to Cision.
Getir partners with Just Eat Takeaway.com and nears buying Gorillas for peanuts.
Atomico added 7 more venture scouts.
FTX Ventures, the investment arm of the now famous crypto hedge fund that just went bankrupt for the lack of circa $8 billions, has invested in Europe in Celestia (Lichtenstein), Xterio (Switzerland), Soba (Germany), Euler XYZ (UK) and SEBA Bank (Switzerland).
Sam Bankman-Fried (SBF), the master dude who imagined FTX, also invested in Causal from the UK, via a $20 million deal led by Accel and Coatue.
Btw, here’s FTX’s inside story, if you live under a rock.
Twitter’s engineers from Europe have been cut off from Twitter systems and received a HR email saying their voluntary resignation has been accepted. However, none of them volunteered to resign - they just did not click "yes" on a form sent via email by Elon Musk asking them to explicitly say whether they’d like to stay in the company or not. This has implications on so many levels because the European legislation is very different than the American one - until local media discovers the subject, just follow crowdsourced journalism for staying updated. Twitter’s case is one for the textbooks.
🏃♂️ Cool jobs:
🏃♂️ On the move:
Mats Eklund - COO/Partner at Sofinnova
Sandra Cadiou - head of communications at Revaia.
Rubina Singh - principal at Octopus Ventures.
Richard Hoyle - head of European Information and Media team at Evercore
🗣️ Cheat sheets:
ICYMI: super founders of Europe.
Interesting startups: climate-focused, marketplaces, cybersecurity, web3.
Good to know basis
👉 Building investor signals for a pre-seed startup - some basic rules.
🤔 The mental mapping of a startup opportunity - simple terms
ℹ️ Startup budget planning - for 2023.
💲 Founder's guide to B2B sales - useful
✍️ No one is having fun now - WAGMI
Have you produced useful resources for the community? They can be events, reports or tools - send me an email with submissions at drnovac@gmail.com
Reality checks
🤑 How to steal $8 billion - FTX’s balance sheet explained.
💱 Corporate finance 101 - applied to Twitter’s financials
🔀 Mobility sharing white label - At a hotel with a fleet of 25 scooters serving 200 people for 12 months, you could make roughly $162,000/year in revenue.
🤔 The hiring system is broken - The recruiting market mapping.
🚀 Why building the metaverse is hard - it takes time and money
🖖 The Klarna complex - are markets bad because media is bad?
🙈 Consultants coulda woulda unicorns - building startup unicorn has gotten to the point where McKinsey sells reports with a recipe for building one. Remember, nobody hires consulting firms to start a company.
Closing notes
🤖 End of the world is coming - men aren’t producing as many sperm as they were decades ago, a crisis that could threaten mankind’s survival.
🤔 How to talk to your boss - useful for employees
🤑 Founders - *don’t* give VCs $100 Amazon vouchers to just listen to a pitch. $500? :D
⌚ Garmin has a smartwatch for kids.
🛏️ Louis Vuitton to open a luxury hotel in Paris.
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