3rd July 2023
Finding their first investors is a crucial step for start-ups, but it requires navigating various hurdles along the way. Drawing on the expertise of EIT Health, Europe’s largest healthcare innovation network, we delve into the top obstacles that start-ups encounter during this critical phase, from dispelling misconceptions to finding the right investors instead of the one that offers easy money.
Funding is a challenging endeavour for early-stage start-ups. It is especially true in Central, Eastern and Southern Europe. Thanks to important changes facilitated by the European Union and national institutions in recent years, there are now numerous programmes addressing these issues and it has become easier for start-ups to find funding. Still, founders tend to seek investment everywhere, instead of focusing on finding the right investor, who will fit into a long-term strategy.
There are several pitfalls that start-ups may encounter in their search for investors, but there are solutions as well. The insights provided draw from the expertise of Tamás Békási, EIT Health’s Business Creation Manager in the RIS region, a group of 13 more progressing nations in terms of innovation.
From cultural preparedness to investor reputation
- Cultural preparedness: Start-ups 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. According to Tamás Békási, “Start-ups 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 added, “This challenge is especially prevalent in healthcare start-ups, 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. Start-ups 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 start-up’s goals, values, and long-term vision.
- Dispelling misconceptions: Many start-ups 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. “In reality, it is a collaborative relationship where both parties compete for each other’s benefit. Start-ups have the privilege of selecting their partners, but they should also recognize the value that investors bring to the table”, stresses Tamás Békási.
- Strategic Investments: Investing without a clear strategy can be costly. Some start-ups 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, it is crucial to evaluate investment proposals carefully and ensure they align with strategic goals.
- Undervaluing or overvaluing the company: Start-ups 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 start-up’s future fundraising efforts. “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”, highlights Tamás Békási.
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 start-ups 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 start-ups 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.
In addition to the educational modules, the Attract to Invest programme offers a non-refundable grant of €25,000, which includes:
- up to €5,000 for travel and accommodation during the bootcamp in Vienna.
- up to €5,000 for advisory services from the EIT Health Mentor and Coaching Network. This network comprises hundreds experts from various domains (legal, communication, sales etc.), medical specialists (oncology, radiology etc.), and market-specific specialists (e.g., Norway, Germany) available to assist start-ups.
- up to €20,000, which the start-up 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.
The second edition of the programme is currently open for application. 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 20 teams will present to the jury, and the top three will receive cash prizes of €20,000, €15,000, and €10,000, respectively. This event offers valuable networking opportunities with investors. Founders interested in participating in the programme can apply by July 21 at the programme website.
A success story from Croatia
Ani Biome, a Croatian company specializing in personalised fermentation-derived metabolites to fortify gut health and vitality, serves as a testament to the success of Attract to Invest Programme 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 significant sales in the EU, Switzerland and UK, and they are preparing to launch in the US by the end of the year. Their participation in the first edition of the programme led to successful fundraising, securing €1.1 million in pre-seed funding. They are currently progressing to a new funding round, totalling €10 million.
“Finding investors is undoubtedly challenging for start-ups, but it is crucial to focus on finding the right investor rather than dwell on the difficulties”, concludes Tamás Békási. He adds, “EIT Health Attract to Invest programme addresses these obstacles through educational modules, providing start-ups with the necessary knowledge, skills, and support to secure funding. With a strategic approach and the guidance of experienced professionals, start-ups can overcome the hurdles and thrive in the competitive business landscape.”
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