London startups: The fundraising experience

Published in Megabuyte, January 2013. Original article here (£).

fundraising experienceThe Early View
London startups: The fundraising experience

London is rapidly emerging as one of the best places in the world to be a startup. Even if opinions differ on the details, most people in the community seem to agree on this fact. “I think London is at just the right inflection point, where after a number of years there is finally real support of entrepreneurship across the country,” says Jeff Lynn, CEO and co-founder of fundraising platform Seedrs. More activity from angels and government initiatives such as the Enterprise Investment Scheme is one thing, but Lynn also emphasises the improved acceptance towards risk: “If you talk to people in their 50s or 60s they tend to say, ‘Oh failure will ruin your career’. In the past that was true, but the consequences of failure are not as substantial as they once were.”

If you try and you fail, and the reason you failed is not that you were lazy, stupid or corrupt, said Paul Graham of Y-Combinator, then you will benefit from it. Until recently this has been an attitude confined to the Valley, where six decades of startup history means company founders can pitch to investors who once stood in their place and know what it’s like. But London is now starting to wake up to how innovators should be nurtured, and there’s something to be said for being an entrepreneur seeking funding in a young, dynamic area undergoing rapid growth. London provides a real opportunity for startups to stand out, with pressures (and valuations) remaining more down to earth. Following our interviews with London startup investors, we take a look at the issue of fundraising from the point of view of company founders.

Money via networking
Geckoboard, the real-time application monitor, recently completed its second round of fundraising, following its seed investment in December 2010. “I had the idea in March 2010, and the following July was when we had an alpha version of the product. In startup speak it was a minimally viable product, just to solicit feedback, and by August we’d got some traction,” says Paul Joyce, CEO and co-founder. This was also the point at which Joyce quit his day job, to give his full attention (and savings) to Geckoboard. The investors followed shortly after, in a chain of events not dissimilar to how networking has secured funds for several UK startups: “[Investor] Christoph Janz got in contact way back in July 2010 saying that he liked our product. Then when he found one of his portfolio companies to be using Geckoboard it was brought to his attention again. At that stage I as looking at maybe raising a small amount of money, so I spoke to Christoph and he was interested. It happened very quickly.”

But Joyce won’t describe the fundraising process as easy. Being a three-person team at first, it was demanding to take one person away from running the company to go to meeting after meeting to look for money. “It’s not something that falls in your lap. A lot of thought goes into it. How much are we going to raise? What sort of venture is going to add value? How much equity are we going to give away?”

Not to mention how getting funding is not an end-point for a startup, but an opportunity to keep developing the product to hopefully become a long-term value business. Following the second round of fundraising earlier this year, Joyce says the key challenge is to demonstrate traction and show the people are responding to what you are trying to do. And of course, you have to make sure people know who you are: “We put ourselves on Angel List, which is a fantastic resource for seed funding. I think we’re still the most followed European start-up on Angel List actually; we had a lot of meetings and we were over-subscribed.”

Beyond the bootstrap
Fintech software upstart FundApps, which caters to hedge funds, managed to get up and running without resorting to outside funding at all. Even as the company expands, CEO and founder Andrew White says he doesn’t expect to raise any money.

“We bootstrapped the company at first, and within a couple of months we had a beta product we could show,” says White, who then reached out to some former clients in the process of setting up their own company. FundApps differentiates itself by providing a lower cost Cloud service for hedgies to keep on top of regulation in different jurisdictions. As the first sale was secured within four months, the group was profitable almost right away. The aim for FundApps now is to expand the client base, which currently numbers only three but one of which is “one of the biggest banks in the world”. But even as the group plans to sell the software internationally, White doesn’t foresee the need to reach out for funding: “There’s no real scaling issues with the company, except for sales. The software is written, and if we want to go into China we will use sales and operations people on the ground. […] This was one of my aims for the company: to create something that could scale pretty much infinitely without having to put lots of people in. This should also keep us nimble and innovative.”

Bootstrapping was also the plan for James Gill, CEO and co-founder of real-time web analytics outfit GoSquared, until Eileen Burbidge from Passion Capital got in touch. The company has since raised a second round, with Passion and Atlas Ventures.

“Initially I never really planned to raise money. I hoped to get enough money from our paying customers to fund what we were doing, and maybe that could help us get through university,” says Gill. The plan may initially have been to use GoSquared to pay for school, but Gill and his young co-founders now have bigger ambitions for their company: “I’m really glad the opportunity came around. It’s enabled us to take what we’ve done way above what we imagined.”

Still the web, but different

While the UK will continue to take a backseat to the Valley simply because there’s a lot less money sloshing around, the general attitude seems to be that this is improving, slowly but surely. While the companies emanating out of London tend to span the full spectrum of industries, the entrepreneurs succeeding in raising money in London do tend to have a distinct second-generation feel about them. A good example of this is the contrast between dot-com success Lastminute.com and Taggstar, the web content monetisation group set up by a former director of the travel site.

“What was different when Brent [Hoberman] and Martha [Lane Fox] started Lastminute.com in 1998 was how there was a fresh open marketplace, with real first-mover advantage in sectors like travel, clothes or online shopping in general. While there’s huge opportunities also now, it’s harder to break ground in existing verticals,” says Taggstar CEO and founder Fraser Robinson, who was managing director of Commercial & Media at Lastminute.com and around for the “growing pains and exit pains”.

“Had Taggstar been a business looking to sell something or attract an audience to a website it would have been a lot harder to raise money,” says Robinson, who secured £1.6m for the group in 2010. “Instead we are a tech provider, offering third party solutions to other websites in a very scaleable manner. These are the sorts of businesses where it seems a lot of new investment is going now: company that make existing sites better, more efficient or profitable, rather than trying to be a destination site.”

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