5 Tips To Avoid The Series A Crunch In Europe

For the last few months, a reappearing storyline has been flashing on the front pages of our beloved tech blogs.  All the usual suspects, TechCrunch, The Next Web, Forbes, Inc, and others have published articles about the possibility of a startup bubble about to burst.  Some groups, CrunchBase I’m looking at you, are even seeking to capitalize on the Series A gap by selling curated lists of startups that are about to go bankrupt based on their last round of fundraising.  The scheme here is that other companies can purchase this list to poach the talent from these doomed zombie startups.

The formula essentially works out to the following ‘scientific’ algorithm:

(All of the startups with 13+ months without closing a new round) – (the companies that announced new hiring or were acquired)  = potential startups about to go under.  

You can debate the ethics of this list or the quality of the data behind it, but the underlying questions remain, what are the consequences of this fundraising bottleneck and how will it effect the European startup ecosystem?

First of all, this is Europe, not Silicon Valley.  The Series A crunch was invented here and it never left.  Bitching and moaning about the lack of VC capital is typical breakfast banter in these parts.

Secondly, it’s likely to get worse before it gets better.  Europe is experiencing its own angel investment bubble and the consequences are beginning to take shape across the continent.

Bubbles are created when unchecked optimism collides with the fear of being left behind and it triggers a wave of irrational behavior in a given industry.  It’s human nature to overreach and we are very emotionally-driven creatures.  We are wired to be optimistic about investment opportunities and anxious that someone else will get there first, rather than being predisposed towards careful analysis of the long-term consequences of our actions.  In other words, the ‘shoot first, ask questions later’ approach will continue until the bubble collapses.

Make no mistake, the entrepreneurship fever in Europe is in full effect and it’s producing a significant upswing in incubators, accelerators, business angel groups, convertible loan programs, and government grants all more than willing to bet a few thousand euro on as many projects that cross their collective desks.

Mix in a seemingly never-ending economic crisis and suddenly everyone is an entrepreneur.  When anyone with a brain and a halfcocked idea can get their hands on some seed capital, startups begin multiplying like bunnies across the continent.

While entrepreneurship is an amazing vehicle to stimulate economic growth, an overwhelming focus on highly scalable, internet ventures over more traditional local businesses may lead to undesired outcomes if the bottom falls out during the critical fundraising moments.

However, it’s not all bad news.  There is a silver lining to the fundraising hardships European startups face.  The lack of available funding and ever-increasing competition forces EU startups to be laser-focused on finding a sustainable business model and getting to positive EBITDA as fast as possible.

Here are 5 tactics you can use in your startup to battle these intimidating financing trends:

1. Keep your burn rate low – bootstrap all the way to the bank.  Don’t go furnishing your startup with Macbooks and Ping-Pong tables just because you raised a seed round.  Keep on leaning on friends, family, and interns as much as possible.  Make sure you are scaling your internal operations in accordance with your paying customer acquisition rate.
2. Cultivate a sales culture into your company from the top down – the entrepreneur, NOT just the sales guy, should set aside time everyday to make cold calls, go on meetings, and create new partnerships that will generate real revenue.  We all know how easy it is to sit at your desk and polish your product, but with out proper communication and sales channels, your ideas are worthless.
3. Build with the paying customers on board – don’t waste a euro on a new project until you have validated your idea in the marketplace.  Use surveys, call friends in relevant industries, and ask around: who is willing to pay for this and how much will they pay?  If possible, finance your new product with down payments from the clients BEFORE you start building it.
4. Have an exit strategy from the start – there’s nothing an investor cares about more than their prospects for a successful exit.  Draw out your roadmap for growth until acquisition (or IPO) and make it believable.  Set meetings with potential buyers, keep them in the loop to your progress, and show your potential investors how they can receive more than 10x ROI in less than 3 years.
5. Network your ass off!  This is mandatory, all the time.  You are an entrepreneur and that means you need others to buy into YOU before they buy into your product or service.  No one likes to invest in or buy from an unknown entity.  Make sure they know who you are and what you’re up to long before you go recruiting for their time, money, and resources.  If you do this right, you’ll never have a cold introduction again.

Hopefully, the Series A crunch is just a temporary hurdle while we wait for the VC funds catch up, but with careful planning and effective use of your resources, you will sleep better knowing your Series A can wait for the right opportunity. Meanwhile, share your stories and advice for raising money in Europe.