Suhayl Zulfiquar, CEO at Datatecnics, shares his experience of raising funds – valuable reading for any founder:
Raising venture capital is hard. Less than 1% of companies in the US are funded this way and for every 1 dollar of that venture capital only 14 cents finds its way into a ‘clean-tech’ start-up.
The VC market in the UK lags behind its US counterpart so dealmaking here ― both in terms of deal volume and size ― doesn’t compare to what we see across the pond. And the omnipresent afterglow of our tumultuous and clunky departure from Europe is likely a prime contributor to the fact that last quarter saw the UK deliver the lowest volume of VC deals since Q2 2018.
In short: if you’re a sustainability entrepreneur looking to raise capital in the UK equity markets right now…it helps if you’re into the whole masochism thing.
Uncomfortably-close-to-the-bone humour apart: I don’t say any of this to dishearten. Entrepreneurship is an essential component of the response to climate change and the trend is positive with respect to investment in climate tech.
If you’re a sustainability entrepreneur, and you’ve come to the conclusion that venture capital is right for your business (and often, it isn’t), my hope is that through the reflections below you’ll, at least, if absolutely nothing else, be slightly better prepared for what is an incredibly time- and energy-intensive exercise than prior to reading this.
These are 5 key lessons learnt by us at Datatecnics raising £1.2m of seed capital in a constrained environment for growth capital.
1) Alternative funding sources | This is really about probability more than anything else. If you’re competing for 14% of 1%, you’re attempting to be amongst the 0.14% of businesses that raise ESG-focused VC. This is crude and not sensitised to geographies, verticals or demographics of founders but it still follows that you ought exhaust all other, more probable sources of funding for your enviro-tech business…which is basically everything other than VC.
There are a vast number of alternative funding mechanisms (innovation loans from InnovateUK, grants from InnovateUK, grants from the European Commission, amongst others) to explore. These are still highly competitive instruments but they are intrinsically designed to take on higher levels of risk than VC and aren’t dilutive. Of the £1.2m we raised only £400k came from venture capital, the balance coming from a blend of grants and loans which had the added benefit of minimising dilution for existing shareholders – something about the round’s structure that we were particularly proud of.
Also, don’t feel like your business will only move forward through raising hard cash. At the end of the day you’re raising money, at this stage, to get your MVP into the world and generate some initial sales. Accelerators are great for this. Datatecnics wouldn’t be where it is today without these and if you’re in the water space I could not recommend the folks at Imagine H2O and United Utilities enough.
2) Risk quantification | ESG investment might be trending upward but non-ESG investors still make up most of the market. Being proactive in communicating the risk to them, as you see it, is something they’ll appreciate as non-sector experts and will help push you toward a term sheet. Not speaking about risk and how you’re managing it is a surefire way of making investors nervous.
3) A lead investor | In line with the point above, you should aim, generally speaking, to de-risk the investment as much as possible. An excellent way to do this is to find an investor to lead i.e.: don’t expect a single investor to come in and fund your whole round. One of our key takeaways was how much confidence co-investment can bring. This is an especially important point if you’re in the sustainability space. Relatively, there aren’t many sustainability-focused investors, such as Vala Capital who invested in us, so you if you can identify a sector-specific VC to lead and introduce them to other investors, the deal risk is distributed making your incoming investors more confident to execute.
4) Recognise your own worth | I know this reads like it’s straight off an Instagram post with calligraphic writing set against an inspiring background, but it really is an important point. Often, clean-tech founders will try to compete for a VC’s cash by focusing too narrowly on financial metrics, minimising the USP they have to offer: their environmental metrics (water leaks prevented / carbon captured / cows’ lives saved). Lead with these impact metrics and underpin the growth of the market year-on-year. This applies to hiring too: people will want to work for you because it’s ‘tech for good’. Don’t underestimate the value in that.
By the same token: have the confidence to ask the questions you need of investors. Primarily, whether they have the money to invest because many will be making grandiose commitments to you whilst not having the capital to deploy.
And, ultimately, if the deal’s not right…walk away. As hard as it is, you might survive the short-term raising the wrong capital but unlikely much beyond.
5) Timelines | Seed VC investment in the UK takes a lot of time; expect it to take longer as an enviro-tech entrepreneur.
We started raising at the end of 2019. Had a deal ready to execute by mid-2020. The deal fell through at the end of 2020. We went out to market again at the start of 2021. Built the consortium of investors we wanted by September 2021. Executed the deal we wanted in March 2022.
Give yourself plenty of time. I’d say 12 months before you think you’ll run out of cash. (This will also mean you’ll get better investment terms.)
I hope these reflections from our raise are useful to founders building climate and environmental technologies. You’re fighting the good fight and if we at Datatecnics – as an organisation or myself personally – can support you in any way, please do reach out.