6 hurdles startups face when seeking investors – and how to overcome them (Sponsored) | EU-Startups

6 hurdles startups face when seeking investors – and how to overcome them (Sponsored) | EU-Startups

Time Stamp: July 3, 2023 4:42 AM
Source Node: 2747891

Finding your first investors is a make-or-break moment for startups, but it is not such an easy task. Drawing on the expertise of EIT Health, one of Europe’s largest healthcare innovation networks, we delve into the top obstacles that startups face during this pivotal stage, from dispelling misconceptions to finding the right investors instead of the one that offers easy money. Moreover, we also shine a spotlight on how startups can overcome them by participating in the “EIT Health Attract to Invest programme” giving a success story from Croatia as a reference to the programme’s success.  

Securing funding is an arduous journey for early-stage startups, especially in Central, Eastern, and Southern Europe. However, thanks to significant efforts by the EU and national institutions in recent years, the landscape has undergone crucial transformations. Numerous programs now exist to address these challenges, making it relatively easier for startups to access funding. Despite this progress, founders often cast a wide net in search of investment, rather than focusing on finding the perfect investor who aligns with their long-term vision.

In the quest for investors, startups may encounter various obstacles, but fortunately, there are solutions available. To shed light on this topic, we turn to Tamás Békási, EIT Health’s Business Creation Manager in the RIS region, a group of 13 nations that are making remarkable strides in terms of innovation. Tamás gives us valuable insights into the pitfalls and strategies for startups seeking investors.

Cultural preparedness: Startups often lack the cultural background to work with institutional investors. Many founders come from a friends-and-family environment, where flexible hierarchies prevail. However, when these inexperienced and often young teams interact with seasoned business professionals, it requires a different mindset. Tamás Békási stated: “Startups must learn how to collaborate and understand the expectations of investors. It’s crucial to realize that investors are not cruel wolves, nor are they altruistic angels; they are business-oriented individuals.”

The expert also added: “This challenge is especially prevalent in healthcare startups, where students and doctors often take the initiative to innovate and form teams without the necessary business acumen to navigate the world of investments. 

Choosing the right investor: According to Tamás Békási, selecting the first investor is like entering a marriage. In the best-case scenario, the partnership lasts a lifetime. However, if the match is not compatible, it can result in a painful and potentially damaging breakup. Startups are already in a fragile state, and going through a separation can add further strain, potentially leading to the demise of the company. Thus it is essential to carefully choose investors who align with the startup’s goals, values, and long-term vision.

Dispelling misconceptions: Many startups mistakenly believe that they hold all the cards and that everyone should fight in their favour because they are special “snowflakes”. On the other hand, investors also occasionally fall into the trap of believing that their money grants them absolute control. Tamás Békási stresses: “In reality, it is a collaborative relationship where both parties compete for each other’s benefit. Startups have the privilege of selecting their partners, but they should also recognise the value that investors bring to the table.”

Strategic Investments: Investing without a clear strategy can be costly. Some startups see investors as an easy way to make money. After a successful pitching event, investors might approach them with an alluring offer, but it may turn out to be a one-time deal that doesn’t align with the company’s long-term plans. According to the EIT Health Business Creation Manager in the RIS, it is crucial to evaluate investment proposals carefully and ensure they align with strategic goals.

Undervaluing or overvaluing the company: Startups often face hard decisions when valuing their company. They might sell a significant stake for a small investment because they desperately need the money. However, they may not consider the consequences for subsequent funding rounds, where they would have to give up even more equity. Conversely, setting the valuation too high in the first round may make it difficult to attract additional investors who are able or willing to write big cheques. Finding the right balance is crucial.

Investor reputation: The reputation of an investor can impact a startup’s future fundraising efforts. Tamás highlights: “If an investor has a weak reputation, or is known to be difficult to work with, it may deter subsequent investors from participating in later funding rounds, as they must enter into a syndication agreement with each other. While the first-round investor is often critical for survival, it is important to consider the broader implications of their reputation.”

Fundraising bootcamps and board room simulations – overcoming key challenges

Investment-focused programmes like EIT Health’s Attract to Invest tackle these challenges head-on. The programme focuses on supporting startups that have already entered the market and initiated sales processes, attracting interest from potential investors. The programme comprises two key educational modules:

  • Fundraising Bootcamp: This module covers the aforementioned challenges and pitfalls. Participants are not beginners; they have considerable pitching experience from various events and competitions. However, pitching to investors requires different skills and insights, which this programme provides. Key tools such as a Term Sheet (defining the company’s value and revenue prospects) and an investment strategy (outlining the investment and company structure over a five-year horizon) are also introduced.
  • Board Meeting Simulation: This module prepares startups for the realities of their partnership by simulating board meetings. Each team is assigned a real investor who challenges and questions them every two weeks, addressing topics they may not have anticipated. The aim is not to discourage but rather to open their eyes to potential challenges.

EIT-HEALTH-3

EIT-HEALTH-3

In addition to the educational modules, the Attract to Invest programme offers a non-refundable grant of €25,000, which includes:

  • €4,000 for travel and accommodation during the bootcamp in Vienna.
  • €6,000 for advisory services from the EIT Health Mentor and Coaching Network. This network comprises hundreds of experts from various domains (legal, communication, sales etc.), medical specialists (oncology, radiology etc.), and market-specific specialists (e.g., Norway, Germany) available to assist startups.
  • €15,000, which the startup can allocate based on their plan and intended next steps (e.g., seed funding, Series A investment, crowdfunding campaigns). EIT Health does not require any equity in return.

This year, an additional element has been introduced: the Grand Final in early November. Participating teams have the opportunity to pitch for further funding. All 15 teams will present to the jury, and the top three will receive cash prizes of €25,000, €15,000, and €10,000, respectively. This event offers valuable networking opportunities with investors.

A success story from Croatia

Ani Biome, a Croatian company specialising in fermented vegetable and mushroom extracts that strengthen gut flora, serves as a testament to the success of Attract to Invest. The founder’s personal struggle with a life-threatening case of gut inflammation inspired the development of their product. Ani BIome’s marketable solution has already achieved 700,000 sales. Their participation in the 2022 edition of Attract to Invest programme led to successful fundraising, securing €1.2 million in seed funding. They are currently progressing to a new funding round, totalling €3.8 million.

Tamás concludes by saying: “Finding investors is undoubtedly challenging for startups, but it is crucial to focus on finding the right investor rather than dwell on the difficulties”, He also adds: “EIT Health Attract to Invest programme addresses these obstacles through educational modules, providing startups with the necessary knowledge, skills, and support to secure funding. With a strategic approach and the guidance of experienced professionals, startups can overcome the hurdles and thrive in the competitive business landscape.”

Time Stamp:

More from EU-Startups