The SeedLegals and Seedcamp guide to fundraising

Anthony Rose: All right. So let us begin. So thank you, everyone, for joining. Now I was checking my emails, and I can see I first connected with Carlos back in 2014. You know, everyone talks about, how do I meet a VC? How do I get a cold call? And, son? Actually, it turns out we met at a dinner, and then I sent probably a terrible outreach email to Carlos the next day, which he amazingly responded to, and we met.

It was like a decade ago. It’s amazing. SEIS had just been introduced in 2012, 2013. That’s how long ago it was. And so Carlos and Seedcamp, along with Reshma and Tom, have been trailblazers, and really, my hero VCs in the space. You know, you hear a lot about VCs that are so-so, that it’s rare to find an intellectual and one who’s written a book.

So today we’re here to meet the team at Seedcamp, talk about the book. And then also you hear me talking a lot about things from the founder perspective. So today I’m going to try and talk less, listen more, and get words of wisdom from the Seedcamp team. So anything that you would like to know about how you pitch to investors, what investors look for?

What are the key things of the fundraising mindset that investors are looking for from startups, crafting your story for today’s market because things have changed from last year, running a fundraising process, the pipeline and then fun things like choosing an investor. It’s all about the brand. What’s not about the brand. And then the role of storytelling and elephants which has got me peaked. So now we’ve got our overview, I’m going to hand over to Carlos. Take it away.

Carlos Espinal: Excellent. Well, first of all, thank you for the nice and kind introduction. One of the funny comments about how we met is that I remember having dinner with this guy that was like brilliant. And I was like, I gotta catch up with this guy. So I think there’s two sides to every story, and Denny, one of the smartest people I know, always had really cool insights into everything. So thank you for hosting, Tom and I.

For those that don’t know who we are, I mean, I’d be surprised since you signed up for this, but just in case, we are a pre-seed and seed investment firm. We use those terms just because that’s what other people are using in the ecosystem. But literally, you can think of us more as the first round, like we are the leaders in the first round of your financing. Does that mean that we’re for everyone? Not necessarily. There’s many things that we can talk about that. And part of the reason why I wrote the book is to democratise the thinking and the sort of thought leadership around what it takes to bring a company to a fundraising environment with a venture capitalist and make that more available to more people, even if not everyone should be raising venture capital. Hopefully, if you read the book and you maybe say, well, maybe this isn’t for me, I achieved the goal to partially to some extent. So thanks, Anthony, for allowing us to tell the story. I’ll pepper in a little bit of comments about Seedcamp along the way since this is kind of both about Seedcamp but also largely about the book. And so before I wrap up just sort of these initial comments, I want to hand it off to Tom so that he can also introduce himself because he’s got a very interesting background.

Tom Wilson: That’s probably built up more than I can justify. But yeah, hi, everyone. Great to be here. And so amazing, such a fantastic turnout for this event. So thank you so much for giving us this platform, Anthony. So yes, I am a partner at Seedcamp alongside Carlos. For me, personally, I’ve been at Seedcamp for 10 years. So I joined… Sorry, hearing my audio is not fantastic, but I can fix that. Hold on one second.

Anthony Rose: All right. So while we wait, Carlos, do you want to show the book?

Carlos Espinal: Yes, this is the book. Go ahead, Tom.

Tom Wilson: So I joined Seedcamp obviously 10 years ago. And then, interestingly, which you know, one of the reasons I kind of connected with Anthony as well, is prior to that, I was a lawyer. So I qualified as a lawyer in the city. I worked in a mix of corporate and fund formation work, so worked with a number of companies in private markets like private equity and venture capital. That’s how I got to know Carlos and the Seedcamp team back in 2014 when we were raising what was Seedcamp’s third fund, but was actually our first institutional fund. So it was a very, very small fund. I moved at that time, when we closed that fund, over to the investment team at Seedcamp and have been there since. So yeah, that’s a little bit about me.

Carlos Espinal: So it’s funny that you mention Anthony when we met, because, ironically, it was only a year after that the first edition came out. So maybe one thing we can do just to kick off this conversation is walk through what’s changed in a decade, right? So this is version one, let me give me a second. There we go. So this is version one, and this is version two. And this is now version three. In a decade, a lot has happened, and one of the things that you can kind of tell that a lot has happened is in this slight little nuance here.

When I started writing this book, there was a certain amount of money that a company would raise for the first round. I wrote the second book right in the middle of Covid, when rounds were just blowing up and exploding. As a consequence, I was really anxious that by the time the book was a year or two old post-publishing, it would be so out of date that if I put a number on the cover it would immediately date the book. So that’s why I put an X. I also knew when I wrote this book, when version two came out, I already knew what was going to happen, which is what we’re witnessing now: the collapse of a lot of the hype money and the companies that raised too much money. This is part of the introduction for version three.

The difference between the versions is that a lot of the advice is very similar. There are nuances in numbers and strategies. Version one didn’t have certain legal structures which we’ll get into like the SAFE didn’t exist. Now it does. So there are some structures that are new. And then there’s other structures that have been around forever. And there’s the psychology of fundraising, which is perpetual.

But I think the most fundamental, interesting angle that I could write finally in version three was all the negative things that can happen in the ecosystem when there’s too much, and it’s too fast. Too much and too fast can lead to bad things. So that’s probably the introduction as to why there’s three versions of the trilogy, if you will. Return of the Jedi, version three, you know, but it’s just the way of capturing how our ecosystem has evolved in 10 years.

Anthony Rose: So, you know, I always talk about agile fundraising, and I think you’ve got agile publishing, which is fantastic. So, you know, to me, the session is for us to get a rare glimpse inside the mind of an investor, and in particular, one of the hottest investors. Some investors are chasing deals. In your case, deals are chasing you. So you’ve got the ability to pick from the best deals and also the ones that will change the game, change the planet, be real disruptors. So I would like over the next 45 minutes to tease out from you those nuggets that could help everyone on this call.

But let me start with what’s changed in fundraising and the rise of agile fundraising. And, you know, back in 2014, pretty much every investor was investing in a priced round and Seedcamp was one of a few that was doing an ASA. Actually, I modelled our SeedFAST on the Seedcamp ASA. That was really the reference material, and in the next decade it went on to change everything. 75% of all the investment that I see on SeedLegals today is not in a funding round. It’s ahead of the round or topping up a round, and that ASA, and the SAFE equivalent in the US, has really changed things. So let’s, you know, over to you to where you would like to start. Should we start, maybe, on that change in fundraising? And then we’re going to go into picking the elephants, or where have the elephants come into it?

Carlos Espinal: Yeah, so it’s a good question, Anthony. I’ll let my colleague Tom talk a little bit about that evolution of the legal structures and some of his opinions there. But I think prior to that, and then I’ll pass it on to you, Tom. Prior to that, it’s probably worth talking a little bit about the mindset because legal structures follow what the ecosystem is doing. They are tools that are being used as part of why people need to use those tools. For example, the original convertible, which is the father, if you will, of the SAFE and ASA and all these things, was born out of a need to not have to price the company accurately when internal investors were helping a company during a recession to bridge to the next round. It was a way of avoiding conflict. It’s a sort of conflict avoidance tool.
Of course, when the market started taking off positively and growing, it continued to be a conflict avoidance tool. But in this case, it was that there was a discrepancy between what the founder wanted and what the investors felt was appropriate, and as a way of reconciling that tension without losing a deal, especially in a hot market.

You start having the birth of this overly simplistic legal framework, which has pros and cons. And you’re seeing some of the negatives of those structures manifest themselves now because they lacked some governance. In some cases, they lacked limitations on how many of them you could have. I talked in the book about what happens when you stack them too much, and then you have a toxic set of circumstances. So I think primarily, what’s interesting is that over the last decade is, where are we in? How investors feel about terms as they apply to startups. And for the people who are in the room listening to this, there’s, you know, when I, when I finish this segment, pass it to Tom. There’s two takeaways. The first takeaway is you need to understand where we are in a cycle and what leverage you have when you’re having a conversation with an investor.

And in the cycle we are in right now, it’s not the same as it was when I wrote the second edition. It’s not this time when you can just expect zero governance and zero provisions for how the company is going to grow and take on additional funding. And so that helps because it means that you don’t negotiate yourself out of a deal. And it means that you appreciate capital that you do get offered versus trying to be overly aggressive about it in the way that maybe two or three years ago you could have been. So that’s kind of the mindset, that is, that you should have, as you reflect on the day and circumstances we’re in today. But maybe, Tom, you can talk a little bit more about the things you’ve seen in the evolution of those structures, how they’re used and what’s most popular now, and why.

Tom Wilson: Yeah, no, I think it’s a really good set. And I think it’s a really important thing to think about the cycle that we’re in when you start to consider what is the structure which is being used more prevalently. I think that, you know, if I look back to 2015, 2016, or so when we started to move, most of the preference that we had was to ASAs over equity rounds. And we’re not prescriptive, right? We’re an early-stage fund that will work. We see the legal processes as an incredibly important step, an incredibly important thing to get right and to be fulfilled with. But also, we’re not going to not invest in a company because they want to do an equity round versus an ASA. Right? You know, we’re going to work with them to figure out the right thing. And we can give advice on what might be appropriate, and then it’s up to the founder and the company to make that call.

But generally, the driving factor was pretty straightforward around why we moved from equity rounds, which we were doing. To provide some context, when I joined Seedcamp in 2014, we were investing €25,000 for 5% of a company and doing an equity round for that. So it was a different time. And then, obviously, the market has evolved. Carlos’s book does a great job of showing the height of that market around 2021 when the Covid boom was coming to its absolute peak. And in that interim period between 2015 and now, I think what we’ve looked at and said, okay, what are the things we want to solve for early-stage companies when they’re raising money? We want to get them funded on ideally terms which are very familiar to the market. So not going to cause any issues for everyone down the line. So very vanilla terms as much as possible, but quickly, you know. So that’s the thing. We want to try and get companies funded quickly and get the money into the company because ultimately, if you’re raising venture capital, you want an injection of money to be able to hopefully get you towards a future milestone where you, in all likelihood, and, you know, Carlos’s book does a good job of, as you said, identifying things which are venture backable and maybe things which aren’t. But if you’re going on that venture-backable journey, you’re going to raise money in the future. So it’s about getting the company money quickly, hopefully as a collective. So you can have that injection at one time. So you have a meaningful amount of money into the company on terms which aren’t going to cause an issue in the future and are very well known, so that you as founders also know.

And so with those things in mind, a simple, you know, like very similar to what we have in the US, where this is very established, you know, probably pre-Series A, everything gets done on safe agreements. And so, having a similar document in the UK made a lot of sense for us. So that’s why we started to go down that route. But, as I said, we’re not prescriptive around it. We think it probably makes sense when you’re raising, you know, maybe up to, I don’t know, 1.5 million, possibly 2 million at the top end. But that’s not to negate the fact that to Carlos’s point earlier, good governance is also incredibly important. And so the higher the number, the more that governance becomes even more important, the higher the number you raise. And that’s not just because the investors demand that. It’s also because, to be honest, that there’s a lot of money going into the company, and as founders, you should want that in a way so that you’re never accused of doing things which are outside of the remit with which you raise that money. So it’s those kinds of factors that come together that put us into the position we are now with what we typically see as the documents that we use.

Anthony Rose: Right. Well, thank you. And of course, what every founder watching this is thinking is, when will the good times be back again? And what should we do between now and then? Should we raise smaller amounts? Should we raise with seed files? Should we wait? Should we do priced rounds? Should we do a down round? Let’s dive into, and maybe that fits into a few different buckets, so to speak. Bucket number one is, I’m a startup, and I haven’t yet raised. There are a couple of us working on our own time. What should we do? Number two, we’ve raised, but we’re not generating revenue. So cutting burn rate is not really an option other than cutting it to zero. And scenario three is a bit more of a grown-up company with revenue, and we have a choice of fundraising at a low valuation, potentially, or waiting, or doing a small top-up. I’d love to hear, and I’m sure everyone would love to hear thoughts on what might be the best strategy in those cases.

Carlos Espinal: Sure, Anthony. I’m desperately looking through the book for the graph that I took from your website, which I loved, and I obviously give credit to in the book, but it does a great job of explaining a couple of things. So maybe I won’t be able to find it in time. I didn’t memorize the page it was on. The resources are there. We’ll talk about it in a second. But, anyway, let’s take a view on what you just talked about, and I think it covers a couple of points. One of them is where we are in the current market cycle valuations traction. And in part of that, an old question you asked about the elephant in the room. So let’s unpack that. This is probably the most monologue you’ll get from me in this entire session, but it’s the groundwork for us to have a proper conversation. So just bear with me on this one.

So fundamentally, the fundraising and the venture capital equation can be summarised into three variables. How much money you raise divided by the post money equals the dilution. Right? It’s a very simple equation. It is not hard. And the reason why I want to start with that is because the dilution, or another way of looking at it, is what the investors want in exchange for their money is the part that is market-driven at the early stages. At later stages, valuations become more important. So one of the key questions people ask all the time is, how should I value my company at early-stage company? How should value? And the assumption is that the valuation that you learn when you go to do MBA school, and you learn DCFs and all these things, that assumption is that the methods that are available for valuing a company that has cash flows can be applied, and therefore should be the starting variable to optimise for in a startup, that’s wrong.

So because there’s no way of valuing a company on the basis of what has done historically at the early stages, the way that it is valued isn’t intrinsically by what it has, rather by what investors need to compensate for the risk relative to the public stock market. So the public stock market comes and goes, depending on interest rates, geopolitical tensions, emotions, fears, and everything that determines the maximum exit price of a company at IPO, but also increases the enterprise value of the people who would normally buy a startup.

Carlos Espinal: So if a company who would normally buy a startup is doing well in the public markets, they have more money, more shareholder value that they can repurpose to buying a startup. So therefore, you get higher prices.
Where we are today is that we have a divergence in the overall stock market with two, three, or four companies in big tech driving most of the growth. And then the rest not doing particularly okay. And the US driving like 60% of the global stock market index. So there’s some interesting insights you can gather from that in terms of which companies startups are interesting vis-a-vis who the acquirers that can afford to buy them are in the public stock market.
So public stock markets dictate top value. Therefore, the higher the public stock market is, or the higher the overall feeling of everything is going well, the more willingness investors are at the early stages to take risks that could manifest into a big exit. When that is depressed, or a segment like a sector is depressed because the entire stock market doesn’t operate as one thing, it operates in different sectors, when the sector you happen to be in is depressed in terms of its public performance, you’re going to have depressed expectations on the exit value.

Now, why is that important? If I bring it back to dilution, it’s because the worse the sector you’re in is performing, the more an investor at the early stage needs to own of your company to get the same amount of economic return. I’m going to repeat that. The more depressed the public market is in the sector you’re in, the more the investor needs to take equity-wise at the entry point so that it equals the equivalent of taking less when the good times are in and having a higher exit. The two things you could equate them. The math is very simple.

So what you have is the beautiful chart that Anthony has on his website, which shows dilution over time, and it maps nicely with public markets. And also it shows the ownership by stage because risk the ownership is a function of risk. So if I know that a company is 100% guaranteed to do really well, I can own less in light of the fact that well, it’s also more expensive to buy more, but and it might not be available. But the need for return isn’t. You don’t need to own 50%.

So where this gets us is that there is a tight range. There’s a very tight range of valuations that are possible for an early-stage company because if you go outside of that range, the investor for any kind of money is basically buying out your startup. And, as we know, early days, you don’t want to have more than, I mean, I’m going to exaggerate the point here. You wouldn’t want to have 50% or higher owned by an external investor at the stage that most everyone here is. Nor would an investor give you money for free. So we know that that boundary is not 0 to 50, but rather it’s compressed into this bell curve, which is what you have on your website, Anthony, of like, it’s a range somewhere between like 12% on the low end to about 25% on the higher end. And that’s the spectrum. And there’s a whole bunch of risks and calibration elements to that spectrum.

But if you, in that simple equation that I started this conversation with, if you put that spectrum in the dilution part of the equation, and you figure out how much money you need to survive for 18 months, which is how everybody really models out their financial models, and that’s, you know, there’s a whole chapter on how to right-size how much money you need. So you know how much money you need, and it’s not always like the most amount of money. It’s like there’s a finite amount of money you need for a small team for 18 months. You can now calibrate your valuation. It’s a simple algebra. And so that is how we get to this evolution of how valuations and traction and ownership stakes affect a company’s valuation. Tom?

Tom Wilson: Yeah, I think Carlos did an amazing job there of summarising the macro. So I’m going to give a go at summarising the micro. So going back to my kind of economics undergraduate days. But I think that when you think about, it seems to be a lot of questions, a lot of talk about like, what’s valuation? What’s the right valuation? What’s the right number to raise? Which are great questions, because it is. It’s a very strange market, right? That you’re all operating in, that we’re investing in. And there’s not like clear kind of public information out there.

I think that the advice which I often give to founders who we work with, even if this is them raising, like, you know, significantly larger rounds in their first round is if you want to get the best price, and there’s a whole conversation around why price isn’t the number one thing to optimise around, you know, terms are just as important which we can come onto in a moment, but sticking with price at the moment. Sticking with Carlos’s exact right assessment of there is generally an understood amount of dilution that you’re going to take at each stage. You know, it’s within this kind of bar chart, this bell curve that he was describing that Anthony and team will share later, I’m sure, will point us towards.

Then how do you get a better price? How do you kind of increase your valuation? Well, it’s generally what we say is, you don’t want to go out to the market or go out to your investors asking for a number which is very high, and scare a lot of people off. Right? You want, if you’re thinking that the amount of money which I need to get through 18 months to be able to achieve some meaningful milestones is X, don’t go and raise X plus 2. Don’t go out with that, anyway. Go out with that number, even if it’s on the lower end. And the it’s much like a sales process like any sales process that you’re selling with, you know, the customers I’m sure you’re selling your products to. You want to get as many people as far through that pipeline as possible.

Tom Wilson: So when you think about investors, if you go out and speak to 30 investors or 50 investors, or however many that you’re looking to target, whether they’re angel investors or funds, whoever they are, you want to keep as many people in that process as far as possible. You don’t want to put a number that immediately qualifies you out and scares people off. The way to optimize the price, the way to get a better valuation, is to get to a point where you have multiple offers in the end.

If you went out to raise 1 million, say, and you have multiple offers, you might be able to say, “Okay, we’re going to raise one and a half because we’ve got two funds or six angels who we think are all fantastic. We want to find a way to get them all in, but we’re not going to change the dilution.” The dilution is going to be fixed at 20%. And then suddenly, you’ve gone from a post-money of 5 to a post-money of 6.

So you’re creating a process that, not playing people off against each other, because that’s obviously not what you want to do, but you’re realistically protecting the interest of your company and maximizing the valuation by keeping more investors involved for longer. Investors are familiar with this process. They understand how this works. You want to make it so that there is scarcity around your company. Your company is an incredibly valuable asset. The equity in your company is incredibly valuable. So optimizing that by speaking to more people through to the end of the day, ideally multiple term sheets, multiple offers, allows you to potentially increase that valuation. We’ve seen that playbook play out at every single stage. At the stages we’re investing in at seed, where we’re competing because this is a very competitive market venture market at the moment, there are a lot of funds and a lot of capital.

To Carlos’s point earlier, there are fantastic outcomes to be made as investors, but also as founders. Investors know that. So on the micro side, pricing things at a level that gets everyone excited is an important point.

Anthony Rose: Okay, so let me dive into a few things there. The first one assumes that your investors are astute and knowledgeable, but of course, particularly in early stage, and when you go into crowdfunding, your investors may not know all of this. So there might be an incentive to raise at a higher valuation, and you often see that in crowd rounds. The first rounds are overvalued because investors just don’t know these things, and then your next round, when you reach VCs, and they look at it with an experienced eye, you now may have a down round. So any thoughts on exploiting investors? When I say exploiting, not in a bad way, but taking advantage of the fact that early stage friends and family may not know valuation. Should you go for a higher valuation always? Is it a bad strategy? And then I’ll give you my thoughts on that.

Carlos Espinal: So first of all, it’s a good question, Anthony, and it’s one that affects everyone more with more complexity than it actually helps. And I think that I suspect your answer and your opinion is going to come from that a little bit.
The biggest thing to factor into answering your question is that it’s a time-bound question. It is a function of when there’s a lot of interest in investing in startups and private capital because public markets are not giving the return, and people feel like they’re individually rich enough to invest in risky assets, whether that be crypto or startups. In that desire to do that, and in relative ignorance of how the efficient market works, they pile into sectors that have stable pricing, and then they warp that pricing not necessarily for the better. Because, as with everything, there’s a point when pricing breaks the utility of whatever it is that you’re investing in, right?

So what I think is the foundation of your question really is a time-bound issue. With what’s going on now, a lot of people being more capital conservative, interest rates being higher, and thus, as a consequence, more money being parked on the sidelines, I suspect that’s going to go down. I don’t think that you can inoculate everyone in the population against this kind of behavior because it comes around every decade or so whenever there’s a financial correction of some sort. So I think it’s just intrinsic with people being exuberant and wanting and hoping that something’s going to be more successful than it likely can be relative to the risk at early stage. It has fallout. And that fallout is that, as you mentioned, Anthony, you sometimes find yourself as a founder who took that kind of money in a circumstance where you can’t reconcile the valuation they came in with the valuation the institutional investors are willing to give you for the traction you’ve accomplished, which is the point Tom was making earlier about round size being too big.
If you can control only one variable as a founder, which is your round size, and the dilution is a function of the market, you have effectively engineered the equation to a higher valuation than the market will support for a continued investment.

Anthony Rose: All right. Thank you. Now, I want to switch gears because you mentioned rounds being oversubscribed and investors trying to get into the round. For everyone on the call, you’re thinking that would be an awesome problem to have. But the reality for most UK startups is you’re desperate. You’re trying to find an investor, you’re trying to find a lead investor, you’re trying to find enough investors.

You at Seedcamp see a lot of founders, and you see a lot of the best founders. So what I’d like you to share is what you look for in the characteristics of a founder and a pitch so that someone on the call would realize what they need to do to improve themselves, which things they need to focus on, and to understand those characteristics that will make or break the investor wanting to be in. How do we create FOMO? Which things do you look for? To me, that’s going to be the most valuable thing for everyone, because if they can hack that, so to speak, then everything else follows from there.

Tom Wilson: Yeah, absolutely. It’s a great question, kind of like the what we look for in founders. To provide some context, we ran some numbers quite recently, and I think from a touchpoint perspective of companies that have been referred to us, companies that have found us through our website, in some way deal information has come into our system, was around about 6,000 last year, and we ended up investing in 37 companies. So that gives you an idea. We took 142 through to a final stage of partner pitch, and we did probably 5x that in the first call. So you’re exactly right, Anthony. We see a lot of fantastic founders building amazing things. And I think some of the things that we look for, we’re at that stage that everyone in this call, well, I think most people in this call, are at a similar point where we don’t have the privilege as an investor, say, as a Series A investor, of investing when there’s a lot of traction, there’s a lot of numbers, there’s an assemblance of something like product-market fit which is typical around the Series A stage.
So we’re not investors who are traipsing through lots and lots of data. Data is helpful, but it’s not usually something that we have the benefit of. So what we have to over-index for and spend a lot of time thinking about is an idea of founder-market fit. What is it that is unique about this founder, this founding team, this collection of people that makes them perfect to be going after the problem they’re looking to solve?

I think that’s the guiding principle. Wrapped up in that, there are many, many factors. It could be, if it’s something which is a very deeply technical or domain-specific space, then of course a technical expertise or a deep understanding of that customer need is going to be incredibly important. Whereas if it’s something that is in a space that is more understandable or more consumer-leaning, then an appreciation for, again, what that consumer journey is. But maybe a magic or a spark outside of that from a creativity perspective might be something that we over-index on.

Ultimately, some of the factors that help companies, you know they might not be enough on their own, but would help this a lot, is we see across a founding team some of the characteristics which are absolutely necessary, some of the things which you’re going to have to do as a CEO in a company are raise money and hire people. Attract fantastic talent around the product or service, or whatever it is that you’re doing.

We’ve seen a positive correlation with people who can present well, people who can tell the story of the company, and have a clear narrative around what they’re doing. If you can usually do that well, you’re more likely to unlock capital from us or from other investors. And also you’re more likely as the person who’s leading on that charge to be able to attract other people to want to come along with you for this crazy journey going on as a founder that we have so much admiration and respect for. If you can get that across in the pitch, it might be the way that you present, it might be the conciseness of your answers, it might be even some of the materials and the way that you’ve put things together. I think all of those are leading factors, and if you can wrap that around a very clear narrative where you explain what you’re doing incredibly well, then all of those things are going to put the company in the best possible light.

Now, there was a question, I think, which was shared around raising for the first time without a product that tested the idea and pricing quantitatively with a mockup.

Yeah, and I think that, you know, I mentioned some of the stuff there around this idea of we’re often investing where it’s a deck, where there’s not much to go on. I think that when it is that side, and this is probably a little bit of favor of that. If you have a product, you have something mocked up, which you’re able to get feedback from, the connection to why you, as this founder, are well suited to doing this becomes even more of a high kind of index. You know, if there is already evidence that you’ve sold the product, or you’ve got a number of customers. And, as I said, we’re never going to be at one where it’s millions in revenue. But if there is something that is tapping into a latent demand in the market, then we can use that as proof of evidence that this person knows exactly what they’re doing. They know exactly where they’re at. If there’s less of that, we come back to some of those characteristics around founders which are always important, but I think that they will just have an even higher weighting in our decision in our process because we need to have that confidence that this is someone who can take the money which we’re going to give them and grow the business. Because we’re, you know, we, we firmly believe that we’re more than just capital. We’ve been around the block a bit. We’ve met with and worked with some incredible founders and been part of those journeys, and been really, really lucky to have that opportunity. And we’ve got an in-house platform of support around things like talent and go-to-market and product assistance and other areas. But ultimately we also recognize that it’s you guys who are building the company, right? We’re a source of capital, and we’re going to amplify as much as possible along the way. But it’s you guys building the company. So we need to have that huge amount of confidence that this team is the team to go and do that, and that’s always the case. But I think when there’s less traction, we spend even longer figuring out the answer to that.

Anthony Rose: All right, cool. So I’m going to shoot a few quick-fire questions in a moment. But what you’ve said exactly matches what I have seen, which is, you know, when you’re doing Series A, it’s like, “Send me the spreadsheet. That’s fantastic. I’m in. What do you guys do again?” Because it’s all about the numbers. If you’re doing millions of pounds a year in revenue, and it’s increasing 2x year on year, it matters a lot less what the team and so on are doing. But in the early stages, when there’s none of that, it’s all about the team. So now a couple of things, which is, you know, one of the things I see as a key indicator of something being successful is, are the founders the audience themselves? And if they are, you kind of build something that’s going to work for you, right? So at SeedLegals, if I can build something that I can use every day, it’s a good indicator that somebody like me will find it useful. But often it’s the case that your team are 20-something-year-olds building something for 70-year-olds, or you’re building something for people in other countries, or you’re building things for a perceived future need. And then it’s a bit more difficult. So I very much like your thinking about, you know, is it the founder sort of market fit themselves?

So now a couple of questions, which is, is it all about the founders, or is it all about the product, and what is the skew between it?

Carlos Espinal: A fun one. It’s usually…there’s several assumptions here, right? One assumption is that you’re trying to back the best founders, and then the assumption is the best founder would probably be able to calibrate whether the product is the right product for the right time, the right market. So there’s a little bit of sort of a circular reference there. It’s like the right product with the right elements and timing to the market usually are a signal that the team has this calibrated correctly, and that they might actually be onto something.

So I can’t…it’s like a chicken and egg question, Anthony. It’s usually sometimes both. You get a sense for whether or not the founding team is tuned into what’s going on in the world, and therefore the product, not necessarily like a physical finished product, but rather the idea of the product is sufficient, as Tom mentioned, but it is manifesting sort of the knowledge and awareness of the founding team. In terms of founder-market fit, of course, as you mentioned earlier, there is a correlation between them knowing who their customer is, and the likelihood they’re going to build something that serves them well.

But another element, and I don’t know if you might have other ones you want to add about other attributes that we see that correlate a product with a team, is the maturity of the founder relationship. And this is probably one of the most sad things of the job. I’m going to share the link on the group chat here. I’ve been blogging for a decade plus, and the number one most-read blog posts are all about the disputes between co-founders. And obviously with cash being more constrained this past year, it’s gone up.
And I think that that’s another thing we look for beyond just founder-market fit is, how well do these people work together in light of what they’re going after? And will they be able to rely on each other to get them through the hard times? But, Tom, maybe you have something to add.

Tom Wilson: Yeah, I think that’s a great point. I think the other one I’d say when thinking about founders and product, it’s…they’re so closely related, right? I think one of the things which we think a lot about is the ability of the founding team, I’m not going to say founder because it’s often across a couple of people, sometimes it’s one, sometimes it’s three, becomes more than three, I think you’re going to have potentially some issues generally when we see bigger teams than that. But I think it’s the pace of potential product iteration. And it’s a really, really important one. So if you think about the products that currently are, the people launch with that are early versions, they’re generally around the kind of seed stage that we invest in. Are they the finished products? Absolutely not, right? I don’t think there’s been any company that we’ve backed in 500 plus companies where the product has stayed exactly the same.

The excellent teams and the excellent companies are those that are able to iterate on their product quickly. And so that generally means as technology software investors, that there’s someone in that founding team who is very, very strong at product and software, but also that there’s someone who’s very, very strong at understanding the feedback that they get early from customers and figuring out the right direction to take the product. If you had to put a, you know, gun to my head, Anthony, and say, is it product or team? For me, it would be team. But it would be team, provided they have the ability to build and the ability to move quickly on product because you could be in…we’ve backed so many examples of this where, you know, sometimes we’ve backed unbelievable teams on paper, and they’ve been terrible founders. Because, you know, maybe they’re institutionalized with the backgrounds they’ve had before. And we’ve backed founders who don’t have that absolute blue-chip, incredible, like, kind of fan company background, who’ve been incredible founders because they have that speed of iteration and ability to move quickly. So it’s hard to give a definitive answer, but I think that’s where…

Anthony Rose: And I didn’t think it was going to be a simple one. So thank you. Now a quick-fire one, which is two or three founders in a team. Who do you want to pitch to you? Number one, is it okay if you have an advisor reach out, or does it have to be the founder, or CEO, or, you know, can it be their assistant? And then, when doing a pitch, is it a hashtag awkward moment if you’ve got two or three people trying to, you know, pitch, or do you just want the CEO to pitch, and everyone else to sit on a chair on the side and not talk? What’s your ideal outreach and pitch?

Tom Wilson: Yeah, I think outreach should come from the founder, and that’s a pretty easy one. At this stage, I think having advisors involved, I don’t think is necessary at all. And I’d actually say it’s a negative signal generally when an advisor is involved. And obviously at this stage, having someone outside of the founding team like an assistant or someone reach out would just feel weird because there’s often not an assistant involved.

Anthony Rose: Okay, and then the pitch itself. You know, you got a couple of founders. You know, they sometimes stand slightly awkwardly on stage, and one of them talks about X and one about Y. What’s the perfect formula that you see, if there is a formula?

Tom Wilson: Yeah, I don’t know if there’s a formula on this point. I think that certain investors prefer certain things, right? I think we, as a fund, like it when there are some materials that can frame the conversation. But we’re almost 100% with stuff which is interesting and can take those materials off-piste and have a conversation. I know other friends at other funds who just like to have a conversation to start with. So I think that you almost have to be a little bit prepared for everything, right? So as a founder, I would say, have your deck ready to go and I can come to like how many people and stuff. But have your materials, have the ability to be able to show a demo, have that all ready in case the conversation goes that way. Because again, it’s about some of the stuff we talked about before. You just want to get that next conversation. You want to get to that. If it’s a first call, you want to get to that second call. Then you want to get to that partner pitch, or IC, or whatever it is. And you want to get to an offer. So have everything ready. Have the ability to be able to follow up really, really well. Follow-up is very important. I’d say, send the deck. Send a link to your notion page, or whatever it is that has some frequently asked questions because that can be a great way of getting across stuff that you didn’t have time to get across in the pitch, particularly if what you’re building is more technical because investors aren’t that smart, right, Carlos?

It may be a side, but most of us aren’t that smart. So help us look smarter to our team by having great materials. And then in terms of numbers of people on a call, I don’t have a strong view on that. I think a first call, just because you’re all really busy. You’re all building companies. Probably divide and conquer, you know. Put one person on that first call, the CEO. Look, titles are crazy, right? Having a CEO of a three-person company, and some people want to be co-founder and co-founder.

Tom Wilson: I’m personally not overly concerned about titles at the earliest stages. Put the person there who you think is going to do the best job of presenting the company, and then we’ll figure out what that title is at the seed stage or beyond. And if you have both of you want to join, that’s totally fine, but I think try and be a bit prepared in terms of making sure you don’t talk over each other. I know it sounds stupid, but investors do look at that, and it doesn’t come across great. Because to Carlos’s point earlier around, you know, is this a company that’s going to work well together? You know, you’re building a company over, if you go on an adventure-backed journey, 7 to 10 years. We’re investing at the earliest stages. So we’re probably looking at 7 to 10 years, and so we want to make sure that hopefully, this company is going to stay found. These are the people we’re investing in. So if we see signs of people talking over each other, or there’s not a clear division of roles, that can be a bit of a sign of, you know, are we going to have some kind of a founder fallout down the line, which could be a negative.

Carlos Espinal: There’s one additional thing I’d like to add to that, which is because you asked the question, what should they do? And I’m going to now flip it and be like, what are people not doing that they should do? The elephant in the room is something that I talk about in the book as a metaphor for not talking about something that is so obvious to your audience that they’re going to be distracted the entire time you’re talking because you’re not addressing that thing.

I’ll use an example. It’s not particularly applicable to anyone, perhaps, but it’s just to illustrate the point. If you’re going to start a new social media company today, and it happens to be about taking a photo of yourself and a photo of somebody else, and that adds authenticity to it. You can talk about how you’re better and everything else, but if you don’t talk about the fact that BeReal was just acquired, and you know how that went, and how all investors might be looking at that sector, you’re effectively mismanaging the opportunity to reposition yourself as either better or different.

And that is what it means to not address the elephant in the room when you pitch, and a lot of companies avoid that. It’s awkward. This is why it’s there, right? It’s kind of like when you dress funny, nobody wants to tell you have a piece of food on your mouth. Nobody wants to tell you. So it’s the same kind of principle. It’s like there’s something uncomfortable, and the best thing you can do is figure out the best way to position that discomfort. If a big player is already doing this, why is it that they’re not going to be able to succeed, but you are? If somebody thinks that this could be easily copied and run by somebody else, why is that not the case? Address the elephant in the room, and you’ll avoid uncomfortable disconnects from investors down the road.

Anthony Rose: Great points. And actually, I was at a pitch session yesterday where a company was talking about using AI to provide, you know, answers for things. And the elephant in the room for me is, where’s that information gonna come from to train their model? Are they gonna scrape the internet? But there’s, you know, memes of the YouTube CEO in a disastrous interview, you know, where? Oh, do we scrape somebody, you know? Do we scrape YouTube or not? I’m not sure. You know, it’s open or not. You know you have to have a great answer for that when people ask, and then the question is, do you even raise it upfront? Okay. So now, switching gears slightly, which is, you look at investor websites, and they say we’re looking for the outlier, the misfit, whatever it is. The reality is most people are building things to solve current problems, and some people are building crazy way-out things. What do you look for in that sort of perfect proposition? And obviously, there’s a spectrum, right? Because if you’re solving a current problem, that’s great, you don’t need to, you know, there’s a demand, but there are probably also competitors. And so you’re probably doing something that’s not far off what is being done already, and you may tweak the pricing or the proposition. On the other hand, if you want to build a Blockchain Island DAO to save humanity, that’s very nice, but there might be some issues with it. So what are you looking for in the spectrum when people come to Seedcamp? And how do you guide people that you don’t waste your time over here, or this is crazy, or do this, but frame it to be more like this, so that the folks at Seedcamp are going to be interested in the Unicorn upside later. Take it away.

Carlos Espinal: So I think you’re asking a couple of questions. One of them is how to frame things best to showcase the likelihood of success. That’s true, and I think Tom covered some of that earlier, and I did as well. And it’s in the book a little bit, and we can go through that in a little bit more detail if you want, Anthony. But I wanted to… There was a subset to the question you just asked that is perhaps a little bit darker, and it’s not always visible to founders, which is, what is the entire ecosystem doing around what you’re building that you cannot see?

I’ll give you an example. If five other companies that are doing what you’re doing have raised money recently that you may not know of because they’re in stealth or something else, but the investor saw them, you are dead in the water. And this is the uncomfortable truth. And you might say, like, why? Well, think about it from an investor’s point of view. If you think of go-to-market as sort of economic warfare, and the weapons are click ads on meta’s properties and other things, and four other companies that are like yours have been invested in by bigger VCs with big, huge rounds, what kind of war chest are you going to have? And so I think part of the challenge with being a founder is you’re playing on a pitch. Like, if you can visualize a football pitch, you’re playing on a game on a pitch where the soil underneath is constantly in flux, and it’s very hard to calibrate where it is, and it’s not out of malice. It’s just the way the market is, right? It happens with VC funds as well, like when a VC fund goes to fundraise, and two other specialist VC funds of the same type go fundraise, that third VC emerging manager won’t get that fund raised. It’s as simple as that.

So I think the best thing that you can do to solve this is just keep your ear to the ground, move quickly, and just be nimble about adapting your story to make sure that you don’t fall into the potholes of those that have raised around you, and it’s always a calibration, right? Like, how many is too many? How much is too much? You know, like, oh, you have three of your competitors just raised recently. Should I stop? Should I…? I don’t have the right answer for that. But what you have to do is you have to be aware of this stuff, and that affects the outcome in a way that is not visible to you. And when you get the rejection emails, you won’t be able to discern from those rejection emails that basically what they’re trying to say is, all my colleagues in the industry have already invested in this space, and I have no chance in being the one who’s going to succeed here. And that is just an uncomfortable truth of how venture and any capital market works. It’s not out of malice. As I mentioned, it’s not like anyone’s trying to be anything that they’re not. It’s just that’s just a fundamental it. So I’ll pause there on that side. Tom, did you want to add something more specific to Anthony’s question?

Carlos Espinal: So earlier, we were talking about the expectation the public market puts on company valuations at the early stages. And similarly, when funds are raised, the fund has to return a certain amount of money for it to be a successful fund. Usually, Tom, correct me if I’m wrong, like, if you’re not returning 3x the fund size, you’re probably not going to be able to say you’re doing well. Is that fair?

Tom Wilson: Yeah, I’d say it’s about that.

Carlos Espinal: So that means that, let’s just give you some easy numbers. Imagine you’re a 100 million fund. You need to return back to investors 300 million, right? And so, as a consequence of that, the issue you have is that it limits the kind of investments that you can make. If you don’t compensate for your losses, which can be very high at early stages, I think our numbers show that complete wipeout losses on investments made is somewhere between 40% and 60%, depending on how you account for companies that haven’t managed by the time you exit the fund. That means that you have, let’s say, 30% of your portfolio has to deliver that 300 million. Right? So you’re now basically operating with a subset of your capital to return a meaningful amount of money to your shareholders to survive to raise another fund. And so that’s why you have to calibrate around startups that allow for a certain kind of size outcome. I gave you an example of a fund size of 100 million. If your fund was 10 million, and then you want to return 30 million or higher, obviously, your return profile would be smaller, right? And so the issue is that there’s this trade-off between the structure of a fund and the size of the fund, and having a team to deliver the services for the fund and the outcome needed.
Tom Wilson: I would also, as an overarching point, say, don’t think about building a company to raise funding, you know. Think about building a company because you’ve found a problem to solve that you think you’re best placed to solve. And then, if you are excellent at that, funding will find you in many ways. Obviously, you have to do the outreach; it’s not necessarily going to just land at your door, but you will get funded for that thing if you are excellent at it. Carlos makes a great point around the underlying issue of why having market awareness is important. If you’re building something like a co-pilot for analyzing legal documents, then you’ve got to be aware of some pretty big players which have been funded quite recently doing that. That’s not to say that it’s impossible to raise, but you just have to go in with a clearer why us, why now, why we’re different.

So, in terms of the wackier stuff versus non-wacky stuff, I don’t think that should be the deciding factor in what you’re going to build, like whether it’s going to get funding from Seedcamp. We’re a sector-agnostic fund, so we are open to opportunities that aren’t as trendy on paper right now. We’ll try and assess those as they come to us. It’s about the founders being able to articulate why it’s them and why now is the time to invest in this. We’re open to those things and will be led by the founders who are building the companies.

Anthony Rose: Alright. Thank you. And one of the things, you know, at SeedLegals, because there are so many startups, I’ve seen everything. There might be something that you think is wacky like doing AI-generated content videos for cats. It’s like, actually, I saw one recently. So, at the risk of breaking some hearts, but it’s going to be useful, what are the top three or five things that you see frequently, which means if you are working on one of these, you might want to think carefully about how you cut through the noise? I’ll go first: finding accommodation for students. I think it’s a problem that many students have, and many people being students then want to create a startup. But actually, it’s a slightly difficult space because they stop being students after a while, so they are no longer the target audience. Students don’t have any money, and there are many others potentially doing this. Do you have any that jump to mind as if this arrives on your desk, you’ve seen a few of those before?

Tom Wilson: Yeah. I’d say in the healthcare space, I’ve been looking at a lot of healthcare companies over the years, and we’ve done a lot of investing actually on the B2B side and helping take drugs to market. So from discovery, development, clinical trials, through to getting drugs approved. I think that space is challenging. The areas that we find challenging in that space are companion apps around specific conditions that have been quite well-served by technology already. There’s still some potential there. So if someone’s building in that space, I still welcome my perspective being challenged because, as I said before, the founders know more about their spaces than we ever will because you are very, very deep into it. But I think some of the challenges we have are around, for us, we’re investing a 142 million pound fund. We’re looking for 10 billion dollar outcomes at the end of the day, and scaling those kinds of things internationally can be tough. It can be tough from a regulatory perspective, especially if it’s a consumer-facing application. It can be quite hard to attract users. So that’s some stuff that I must admit there was probably 6 months or a year ago where I’d be more negative on those kinds of plays, but it’s probably time for me to maybe reevaluate my thinking there.

Anthony Rose: Okay. So that actually cuts to a very good point, which is when you’re talking to VCs, they, as I understand it, you’re going to tell me, are looking for each investment to be a unicorn, which means global scale. Talk to us about that because I think that’s something that founders often don’t realize. If the growth numbers are not large enough, then it is a great business, but not an investable business and not for top-tier VCs. Do you want to dive into that for a moment?

Carlos Espinal: So, earlier we were talking about the expectation the public market puts on company valuations at the early stages. Similarly, when funds are raised, the fund has to return a certain amount of money for it to be a successful fund. Usually, Tom, correct me if I’m wrong, like, if you’re not returning 3x the fund size, you’re probably not going to be able to say you’re doing well. Is that fair?

Tom Wilson: Yeah, I’d say it’s about that.

Carlos Espinal: So that means that, let’s just give you some easy numbers. Imagine you’re a 100 million fund. You need to return back to investors 300 million, right? And so, as a consequence of that, the issue you have is that it limits the kind of investments that you can make. If you don’t compensate for your losses, which can be very high at early stages, I think our numbers show that complete wipeout losses on investments made is somewhere between 40% and 60%, depending on how you account for companies that haven’t managed by the time you exit the fund. That means that you have, let’s say, 30% of your portfolio has to deliver that 300 million.

So you’re now basically operating with a subset of your capital to return a meaningful amount of money to your shareholders to survive to raise another fund. And that’s why you have to calibrate around startups that allow for a certain kind of size outcome. I gave you an example of a fund size of 100 million. If your fund was 10 million, and then you want to return 30 million or higher, obviously, your return profile would be smaller, right? So the issue is that there’s this trade-off between the structure of a fund and the size of the fund and having a team to deliver the services for the fund and the outcome needed.

Carlos Espinal: Luckily, there are different stages and different types of fund sizes for different stages and how much money is needed. So it’s not a philosophical debate about whether fund sizes should be this size or that size. You have a peppering of different fund sizes to serve the entire market. So it’s more efficient than the question sometimes can polarize. But the key thing here is you have to make up for losses, and hence why, if you want to raise money from a fund that is institutional and bigger, you’re likely gonna have to pitch a vision that manifests into a company that exits at 500 million or higher. And that’s just the law of numbers.

Anthony Rose: That’s a great point to understand. When talking to a fund, you have to deliver that vision while simultaneously focusing on building just a product that is going to work in your current country for a subset of users that will reliably work while still showing that upside. Now we’re pretty much out of time. Carlos, any last words for you? Anything we haven’t covered? Any messages you want to get to people watching?

Carlos Espinal: So Daniel raised a fun thread here that I feel is probably worth commenting on verbally because it’s an interesting one. Seedcamp’s been investing in companies since 2007. We’ve invested in some of the best companies in fintech, particularly with Revolut and Moneys, and TransferWise, in addition to other sectors Tom mentioned, you know, our investments in tech bio and healthcare. We have companies in AI like UiPath that IPOed, and so we have a breadth of companies and sectors that we do quite well in. The nice thing about that is that we have a very vibrant community of founders, and that vibrant community of founders can help each other in sectors where they all have similar issues, similar customer types, similar fraud. The question that Daniel asked, I answered in that spirit, and then she came in with a fun spike on the question, well, doesn’t that create a conflict of interest? As an investor, we try to avoid conflicts of interest for obvious reasons. So when we invest, we try our very best to make sure that the companies are not going after the same customer.

Now, what happens as a startup? Life happens. We’ve been in so many companies where pivots happen left and right. It is impossible to know when a founder, a year down the road, says, “Oh, the original product isn’t working. Now, I’m going to go after this,” and there’s an overlap with an existing company. I mean, like, life happens, right? That kind of stuff you cannot control, and you try your best to avoid that. Actually, it happens from time to time. But you’d be surprised how much even what seems to be similar is actually two different customer types. Same product, like same perceived product, but different customer types, you know, where one might go for an enterprise customer, one might go for a small medium business customer. They’re not even bidding for the same customer on click ads. So sometimes it can be misconstrued. But it’s worth noting because when you’re pitching to investors, it’s good to know what they have in their portfolio and looking at it with less paranoia, like, less paranoia of, “Oh, they’ve invested in somebody who’s a competitor.” If they are recently funded and identical in what you’re doing, yes, okay, be careful. But if they’re a more mature company and they’re probably gone for enterprise, they probably have experience they can provide you for how to manage and maneuver that. So part… There’s a chapter in the book about how to select investors and definitely picking experienced ones is a good thing.

Anthony Rose: Right. Thank you. It’s well known that when you send pitch decks, at least to angel investors, they send it to their friends, and certainly people send me pitch decks for competitors that have been sent to them. So don’t assume that just because you have said it’s confidential that it won’t get forwarded, and for sure don’t ask an investor to sign an NDA before you send them a pitch deck, because they get many, many pitch decks, and the ones that require them to sign NDAs just never get a reply. So we’re at the time.

Carlos Espinal: One last, one last.

Anthony Rose: Yes.

Carlos Espinal: I’ve seen the chat channel, this has popped up several times. Can everyone who does not have a technical co-founder raise their hand virtually with the little chat thing, the little participant thing? I just want to get a sense of how many people feel like this is a problem they have.

Anthony Rose: Let me hop in quickly on that one, because that’s also a passion point for me. And I see lots of founders who are not technical. And there’s really a problem to translate what’s in their mind to an engineering team. So, you know, there’s a medical founder going, “I want to solve famine in Africa. I’ve got a grand vision.” People everywhere, and the tech team are going, “Dude, just tell us what is the next feature in Jira or GitHub. What does this translate into?” So without the translation layer, it’s going to be very difficult, and you often find that you built an initial product, and then it gets thrown away because actually it wasn’t scalable and didn’t match what you wanted, and so on. So if you’re not a tech founder, what to do? Well, the immediate thought many people think about is, “I’m going to hire a founder CTO.” But it’s like marriage. You don’t just, like, find someone and the next day you’re married. I think the solution is, you hire someone as a tech lead with a path that they can become CTO and co-founder as it grows and works out. So you don’t just give the mantle of co-founder, but how do you show that path? So to me, if you can leverage that, that’s the way that you work through it yourself, and perhaps also demonstrate that to investors. All right. Now, Carlos, Tom, how can people get hold of you?

Carlos Espinal: We have a form on our website. Tom, do you have the link handy? We have a “get in touch” form on our website. Obviously, we’re on LinkedIn. I’ve shared Tom’s LinkedIn so everybody can follow him there. Mine is there as well. And then we have our website that has a form you can fill out and provide us information. And then I’m on Twitter as well. So yeah, pretty much every channel.

Tom Wilson: I think it’s LinkedIn, Twitter, or X, obviously. Yeah, follow us on there. Connect. And yeah, look forward to hearing from you.

Anthony Rose: All right. Well, thank you so much for that invaluable insight. And I got to find out where the elephant came in. That was the elephant in the room that you’re not talking about. So thank you, everyone. Hope this was helpful on your startup journey, and you know where to find the good folks at Seedcamp, and also they’ve got tons of great content as well. So, thanks, everyone. Have a great day.

Tom Wilson: Thanks, everyone.