Lessons learned from Penta‘s CEO and Co-founder, Lav Odorović, following its €2.2 million seed round.
By Fintech Futures, Sister Publication
Earlier this year Penta – a German challenger bank that provides start-ups and SMEs with digital bank accounts – raised €2.2 million in a funding round that “took us at least twelve months”, according to Odorović.
Having supported Penta throughout these months, with the start-up using EthosData’s virtual data room (VDR) services to simplify the due diligence process they went through with potential investors, we spoke to Odorović about what he learned during the process.
What follows is a step-by-step guide for start-up founders looking to successfully raise capital:
Be clear on why you’re fundraising.
How much money do you need and where’s that money going to go?
It seems obvious, yet too many start-ups go into the fundraising process with vague assumptions and plans. They then struggle to find the right investor and waste time when they should be running their business.
For fintech start-up Penta, it was simple. “No matter how lean and agile we were, we came to a stage as a company where we had to hire more people. If we didn’t then we wouldn’t be able to keep delivering an easy-to-use business bank account to our customers,” says Odorović.
Spend time looking for smart money.
Underestimate how long fundraising takes at your peril.
Odorović explains: “We spent five to six months just researching the right investor for us. A partner who wasn’t simply writing us a cheque, but one who was a good match for what we’re building at Penta. Someone who was able to offer smart money, good advice and suitable financial terms.”
There are a large number of venture capital (VC) firms out there, and even larger numbers of people with the word “Investor” in their LinkedIn bio.
Do your research on who might be a good partner for your company and make sure their interests align with yours. Prioritise quality over quantity.
Once you’ve found the money, nail the approach.
Successfully reaching out to potential investors requires a combination of capitalising on positive buzz, using your network and other people’s, and a bit of luck.
Odorović: “We were fortunate to attract press attention early on and so had some VCs contacting us. I didn’t think these investors were right for us, but it began the process and we were able to capitalise on their interest when talking to others. Our network referred us to investors they knew and, if we wanted to speak with an investor we didn’t know, we always tried to find a mutual connection who could give a warm introduction.”
Writing a cold email to a VC rarely works. (When was the last time you replied to a sales email from someone you didn’t know? Thank God for GDPR.) They don’t have the time to review everything that comes across their desk so, rather than just firing off an email, wait a few weeks until you can find a suitable intro and then email.
Prepare your documents well in advance.
Once things get moving and you have an investor’s term sheet on the table, the fun and games really begin. The due diligence process.
“A word of advice – and one I wished someone had told me – develop all your company materials and information well before the due diligence process begins. Make sure everything is organised so that, when an investor starts the process, you’re not the one holding things up,” comments Odorović.
“This is where EthosData’s VDR services are extremely helpful. For our raise, their virtual data room acted as our online repository, allowing us to store and securely share critical company documents with potential investors. EthosData’s data room solutions were flexible and affordable, saving us both time and money.”
The due diligence process often stretches out over a number of weeks with multiple parties involved. You can lose track of what document you’ve shared with each person and forget who has access to what. A good VDR helps you track all of this.
It allows you to control which lawyer or investor views a given document, see what they’re doing with it, and even prevent someone from printing or sharing highly sensitive company info.
Knowing who has seen a document – or how many times it’s been read – also speeds up your negotiations as it makes any conversation you have with an investor much clearer and easier.
Don’t let your start-up stop.
If you’re not fully prepared before going into the fundraising process then it can become overwhelming and a full time job.
Odorović: “On one side, you need to read numerous pages of legal documents and discuss them with your lawyers. On the other, you need to run your start-up so that there is a business there to invest in! Fundraising is a complex process. It takes time and focus and the more you can do before you really begin it, the easier your life will be.”
Having your investor materials and company documents organised clearly is a simple thing to do, yet one that can save you huge amounts of time down the line. It’s one of the reasons why VDRs have become so popular in the fundraising process. A good VDR provider will take away a lot of the admin you would normally face – freeing up your time to let you concentrate on both your company and your raise.
So there you have it! A five-point plan to run a successful funding round.