Every year, millions of businesses are created around the world. In order for these big ideas to turn into successful startups, most of them will inevitably come up against the challenges of fundraising.
While there is no magic formula, there are variables that founders can hone in on when engaging with potential investors. TNW sat down with San Francisco-based VC Plug and Play early-stage investor Letizia Royo-Villanova during the Red Bull Basement global final in Tokyo to get her insights.
The one thing that really needs to stand out, according to Royo-Villanova, is the drive and authenticity of the founder. “Maybe they've experienced a problem, or know someone that has experienced that problem, and so they really want to solve it. Not because of making money — of course that's a plus — but because they actually care about solving that problem.”
In addition to said passion, the ability to sell is another key skill. Founders are constantly required to sell their ideas to investors, to clients — and also to talent. “The best founders will have the best talent in their team,” Royo-Villanova states.
While direct industry experience is valuable, it's not always essential. “There are great entrepreneurs out there that don't necessarily have that experience. They are kind of born with that drive of founding a company.”
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However, having insight into the customer and understanding the market are non-negotiables: “You really need to understand the pain point and the industry. That is going to facilitate a lot of doors opening in the future,” the VC adds.
Lastly, personality and rapport matter. “I do think that you feel it in the first half hour,” Royo-Villanova says, referring to understanding whether a founder is someone the VC is going to want to spend time with. “If you end up investing in a founder, you are going to have a lot of meetings with that person. So if you don't feel the vibe, you don't want to invest in them.”
Mistakes founders make when pitching
Even though a founder may have the best idea imaginable, creating an impactful pitch is essential in order to get investors on board. (Not everyone has the good fortune to survive a disastrous pitch like the one Nvidia co-founder Jensen Huang famously gave Don Valentine of Sequoia in 1993.)
One of the most common mistakes Royo-Villanova sees is founders spending too much time on describing the general problem as opposed to focusing on their specific solution. “If it's a climate or sustainability startup,” the VC explains, “and they spend 15 minutes talking about how there's a climate issue, I don't need to hear that. They could tell me in one or two sentences. Then we can concentrate on more important things.”
And while solo entrepreneurs may well succeed, the VC is more likely to consider funding a founder team of two or more. “Building a startup is hard enough, and if you do it by yourself, what if you suddenly have a bad week or a bad month? You need that other person to hold you up,” she says. Furthermore, teams with complementary skills are more likely to drive success in the future.
Common pitfalls when running an early-stage startup
Of course, beyond the pitch, there is also the small matter of actually running the business. Specifically, when it comes to fundraising, Royo-Villanova believes that a major misstep is taking money from any available investor without considering strategic alignment.
“The money is going to run out, but the support from the people that invest in you shouldn't,” she says. The right VC can offer help with recruitment, sales, or industry network connections. Pivoting back to the question of talent, hiring decisions is a critical area when it comes to running the business. Founders often try to save money by hiring cheaper talent, but Royo-Villanova says this can backfire further down the road. “It's about finding the right fit for your company and building a culture from day one,” she says. Finally, an inability to pivot is another potentially fatal flaw. “If you have an idea, talk to potential customers from day one, understand if this is something that is actually a problem and that they are going to prioritise and that they are going to pay for and if not, it's ok to pivot. If you're going to fail, fail fast — and it's not even failing, it's just changing to something else.”
Focus on education and supportive regulation could drive European innovation
With all the concerns and recent discourse around the innovation gap between the US and Europe, we could not help but ask the California-based VC what she feels are the most significant areas holding Europe back.
One of the main issues she identifies as a lack of early exposure to innovation and entrepreneurship. “I don't feel I was aware of the world of innovation or venture capital as much as probably some students in the US,” Royo-Villanova (who hails from Spain) says. “If you start from a very young age to introduce that culture of innovation and explain how important it is, it's going to help a lot in the future.”
Regulation and corporate attitudes also play a role. European corporations can often exhibit a risk-averse mindset, in contrast with a more dynamic and entrepreneurial culture from their North American counterparts. Moreover, complex regulatory frameworks can stifle startups from scaling quickly — something initiatives such as the recently launched EU Inc hope to overcome.
Founders seeking to build successful startups need to embody passion and an ability to sell, as well as customer insight, while avoiding common pitfalls including neglecting strategic fundraising and failing to pivot quickly. Meanwhile, Europe's innovation ecosystem would benefit from early education, a shift in corporate attitudes, and streamlining regulations.
Addressing all these challenges together could unlock tremendous opportunities for European startups to create a virtuous cycle of innovation and investments, and spawn more winners on the global stage.