New research from Early Metrics, the rating agency for innovative startups and SMEs, reveals that whilst 83% of the tech start-ups set out to raise funds, 44% fail to raise Seed or Series A funds in the 12 months following their audit.
The study was carried out across 374 startups rated by Early Metrics, all of which claimed they would set out to raise funds in the next year. These companies were revisited at regular intervals by Early Metrics analysts to track their progress.
Key findings:
- 83% of tech start ups rated by Early Metrics set out to raise Seed or Series A funds within 12 months of the audit.
- 44% of these tech startups failed to raise funds in the 12 months following their first rating (104 out of 236).
- On average, the startups in the sample aimed for £985k and actually raised £815k, 83% of the initial goal.
- On average, pre-revenue startups secured 74% of the targeted sum while post-revenue raised 91%.
- More than half of the startups (53%) raised less than they thought they would.
- Out of those that valued their business too high, almost a fifth (18%) still raised more than 70% of what they expected.
- Just one in ten businesses raised exactly the same amount that they set out to – this is due to the difficulties faced by start-ups to value their own business.
- 38% raised more than expected. This is relatively high considering the young age of startups and it shows that investors can sometimes see more potential for growth for the venture than the entrepreneurs can.
Note: All startups in the sample are early stage tech ventures either at their Seed or Series A round.
Antoine Baschiera, CEO and co-founder at Early Metrics commented: “How and when to raise funds for a new venture is both complex and crucial in equal parts. Many set out on this mission too early so cannot present investors with a compelling business case to seal the deal. It doesn’t mean they’ve failed, it simply means they haven’t quite got it right yet.
“For startups it’s very tricky to forecast exactly how much capital will be needed to grow and how high to aim when it comes to fundraising. It’s equally difficult for investors to balance their ambition in terms of returns versus the risks that come with investing in young ventures. That’s why we still see a significant difference between the sums targeted by startups and the actual results of their fundraising. Despite this, the gap between goal and reality is not as big as you would think. This could be a sign that the fundraising process is getting professionalised and entrepreneurs are becoming savvier.”
He continued: “Investors in early stage ventures cannot base their decisions solely on financial performance due to a lack of history so they look at a wide range of qualitative characteristics. It’s worth noting that they don’t focus just on the innovation or quality of the product, but also place a lot of importance on the skills of the team and the company’s reputation. Media influence leads to brand awareness which can in turn boost the acquisition of clients and the prospects of a successful exit.”
What does all this mean for startups raising funds?
- It’s not always easy to determine just how much capital a business actually needs to reach its milestones. Therefore, it’s very common for startups to refine their demand for capital based on the feedback of mentors and investors throughout the fundraising process.
- Sometimes entrepreneurs realise too late that they will need more capital than planned to bring a high-tech product to market.
- Equally, they might decide to lower their asking price because their activity is not going to be very cash intensive (at least at the early stages).
- Another big factor that plays into fundraising negotiations is the dilution risk. Even if the startups does very well, investors stand to make lesser returns if the startup decides to spread their shares between many shareholders and through multiple funding rounds. To avoid this, investors may offer more money on the table but also request a bigger percentage of the company ownership.
- If the startup is not willing to compromise on the composition of its cap table or can’t help planning several rounds of fundraising, then the investor might put forward a lower offer than requested.
- It also common for startups to aim a little higher in order to impress investors and show them they have the potential to be “the next big thing”, hence the fact that more than half raised less than the amount initially planned.
- Startup fundraising is becoming more streamlined. Although the study is not exhaustive, this preliminary data is encouraging as it points to a shift in mindset where young startups are not randomly shooting for the stars any more but instead are trying to set themselves quite realistic goals. Indeed, half of the startups in the sample were relatively successful in their fundraising as they secured between 70% and 150% of their desired amount.
