Nesta is a global innovation foundation. We back new ideas to tackle the big challenges of our time. We use our knowledge, networks, funding and skills - working in partnership with others, including governments, businesses and charities. We are a UK charity but work all over the world, supported by a financial endowment. Nesta is a registered charity in England and Wales 1144091 and Scotland SC042833.

nesta.org.uk @Nesta_uk

Startup Europe Partnership

Established by the European Commission in January 2014 at the World Economic Forum in Davos, the Startup Europe Partnership (SEP) is the first pan-European platform dedicated to transforming European startups into scaleups by linking them with global corporations and stock exchanges.

SEP is led by Mind the Bridge, an organisation based in Italy and the United States, which connects European entrepreneurial ecosystems to Silicon Valley, together with Nesta, the London Stock Exchange ELITE programme, the European Startup Network, the Scaleup Institute, and the Bisite Accelerator.

startupeuropepartnership.eu @sep_eu

This report was produced by Nesta as part of the Startup Europe Partnership project. This project has received funding from the European Union's Horizon 2020 research and innovation programme under grant agreement No 780601.

The principal authors were Denise van Blitterswijk, Christopher Haley and Jessica Febvre.

Design Bond & Coyne

Interviews Rebecca Burn-Callander, Steph Welstead, Will Freeman

Version number: 2.0 June 2019

© Nesta 2019. This work is made available under a Creative Commons Attribution-ShareAlike Licence 4.0 (international).

1. Introduction

1.1 About this report

Why do some startups in Europe scale to billion-euro valuations whilst others barely grow? Despite the best efforts of investors, policymakers, academics and entrepreneurs to determine the recipe for success, there remains a substantial gap with other entrepreneurial ecosystems like the US or Israel, both in terms of the number of scaleups and the capital they raise.¹

This 'scaleup gap' is often explained by looking at barriers on the 'supply side' of the ecosystem, including the availability of talent, access to markets, building leadership capacity, infrastructure, and access to suitable finance and risk capital.²

Whilst these issues are important to address, there is also a need to look at the 'demand side': evidence suggests that some European entrepreneurs are inhibited from scaling by uncertainty over the paths to scale, a lack of confidence in their ability to follow these paths, or mixed motivations based on their perceptions of future hurdles.

This is especially true when it comes to raising finance: one study in the United Kingdom, France and Germany shows that almost 60 per cent of entrepreneurs are not able to access all finance they need from their preferred source, 16 per cent can't access enough capital at all from any source, and 5 per cent don't know where to look.³

A better understanding of the role of different sources of finance in business growth can help entrepreneurs to consider alternatives, and give them confidence to pursue these in order to scale up their business.⁴

This report aims to be both educational and inspirational, combining a practical guide to finance with real-life examples which demystify different finance options. We hope that it serves as a starting point for startups and aspiring scaleups to find inspiration in the journeys of others, and become better equipped to map out their own paths to success.

Although we hope this report is useful for entrepreneurs in all sectors, the focus of this report is on for-profit enterprises. We recognise that social enterprises face additional challenges in terms of creating an attractive business case that also incorporates their mission, and might pursue a different strategy from for-profit startups. For that reason, they will not be considered in depth in this report. We refer readers to Nesta's Making It Big for scaling strategies for social innovations specifically.⁵

1.2 Three basic types of financing

There are three basic types of financing that every entrepreneur will come across at some point: grants, debt, and equity. Many entrepreneurs use a mix of the three, but it is important to understand the differences and how they influence your business.

Grants

Grants are a type of financing that does not require you to pay the money back or give up equity in return. They are often offered by a government, charity or trust. The non-repayable nature of these funds can be attractive, but is often bounded by strict eligibility criteria; finding and applying for suitable grants can therefore be a time-consuming and competitive process. Apart from grants, governments may offer other subsidies for entrepreneurs, such as tax breaks.

Debt

Debt finance comes in different forms, but essentially involves borrowing money that has to be paid back at some point, along with the interest accrued over time. Bank overdrafts and credit card finance are some of the most common types of debt finance used by businesses, including scaleups.⁶

Using debt to finance a business can be a critical decision: research in the US found that a startup using business debt "grows its revenues faster and is significantly more likely to survive the critical first three years of operation than does a start-up firm using no debt".⁷

Forms include:

• Loans and overdrafts: debt offered by banks and other lending institutions, as well as peer-to-peer business or startup loans. Overdrafts tend to be well-suited for financing working capital and to meet short-term requirements, whereas loans are more often used to finance larger and longer-term purchases. A different type of lending that is on the rise in Europe is peer-to-peer (P2P) lending, which refers to online services that match lenders with borrowers – hence removing the role of the bank as intermediary.
• Finance secured on assets: includes asset finance (leasing, hire purchase), asset-based financing (invoice discounting and factoring, asset-based lending and supply finance). The former is a way for businesses to obtain assets such as equipment by securing a lease or hire-purchase agreement that is secured against the asset. The latter is a form of financing where lenders make funds available that are secured against the company's assets⁸, generally used to support cash flow. Different types come with specific benefits, risks and requirements and should be considered carefully.⁹
• Bonds and mini-bonds: a type of fixed-income debt securities. They allow a company to borrow money in return for a predetermined interest rate over a period of time. The sum must be repaid after the 'maturity' date of the bond expires. Traditionally, bonds are traded on the stock market, as opposed to mini-bonds which are promoted to certain types of investors.¹⁰

Unlike equity, debt financing does not involve giving away shares (though some forms require you to offer assets in case of non-repayment). On the downside, debt financing can come with specific conditions (e.g. banks may prohibit you from acquiring other companies till the loan is repaid) and strict repayment structures are often linked to penalties. Some debt, like credit cards, may be easy to obtain but is comparatively expensive in the long term.

Equity

Equity means giving away a share of your company in return for funds. One advantage of this is that the investors share the risk, so if the company goes bust, you share the pain and may not be left with large debts to repay; another advantage is that it can help align the incentives of stakeholders, so that everyone has a reason to want the company to succeed.

One big disadvantage is that it leads to 'dilution' (you will own less of the company, hence receiving less of the up-side) and you might also have to give up some control over decision-making (but see Google's example below). Equity investors naturally want to maximise the value of their stake and typically want to realise this value at an 'exit', which sometimes leads to conflicts in strategy. Equity investment will require a shareholder agreement, for which you will need professional advice.

Many entrepreneurs have understandable reservations about giving away equity: in the UK, for example, only one in four scaleups use equity finance.¹¹ In some cases, this is due to reservations about giving up control of their business; in other cases, it is due to a lack of knowledge or perceived complexity (again in the UK, 17 per cent of scaleups said they knew nothing about equity finance).¹¹ However, even without fundraising, startups may need to think about dividing equity between co-founders, as well as incentivising employees or advisors, and reserving a pool for future reward.

Although ownership and control typically go together, it is possible to separate these matters by issuing different classes of shares. For example, Google's founders, Larry Page and Sergey Brin, have a minority of ownership but a majority of voting rights. Many firms issue two types of shares, 'ordinary' and 'preference', with the latter receiving preferential treatment of some kind, such as priority over ordinary shareholders in pay-outs and compensation in case of liquidation (see glossary). Investors will therefore often demand preference shares of some sort, and it is important to understand the consequence of these – especially if the company were to go bust – when negotiating the terms with them.

Hybrid forms

The distinction between grants, debt, and equity financing is not as clear-cut as it may seem. There are many instruments that combine elements from different types of financing, such as convertible debt, warrants, and mezzanine financing, allowing for a tailored approach to financing a growing business. For purposes of clarity, this report will not discuss these forms in detail, but it is worth keeping in mind when designing a financing strategy that different funding sources can complement each other (also see chapter 3).

1.3 Overview of financing routes

In this report, we look at eight different financing routes, summarised below.

Many of these routes are commonly perceived as being applicable to a certain growth stage or maturity of a business, or only suitable for a certain funding requirement. However, there is a considerable degree of overlap, and changing adoption patterns. The graph below (Figure 1) shows the breadth of investment sizes per round for each type of funding. This serves as an illustration that, rather than thinking only of the quantity of finance required, it is important to instead look at what suits your business (see chapter 3 for further guidance).¹²

The following chapters will present inspirational stories of European entrepreneurs who successfully scaled their business, using one or multiple types of financing. They share their scaling stories and lessons they learned along the way. Alongside these stories we explain the basics of the eight financing routes, highlighting key figures, how it works, relevant facts, and some practical steps and tips to help you get on your way.

For those interested in learning more about entrepreneurs' motivations to scale and their demand for finance, we refer to a follow-up report published by Nesta in June 2019: Motivations to Scale - How European entrepreneurs think about growth and finance.

2. Eight routes to finance your growth

2.1 Bootstrapping

Bootstrapping, sometimes called 'organic growth', is the act of starting and funding a company without relying on external capital. The company starts using only the founder's resources and grows by reinvesting profits into its growth.

For some startups, bootstrapping is not a choice, but the only option until they can convince others to invest in them. For others, it is a deliberate strategy to retain ownership and control.

Good to know

Main advantages - Retain full ownership. - Keep focus on customers rather than investors. - Use freedom to test a product or service, without external pressure to get it right.

Potential challenges - Limited resources may mean slower growth. - No access to investors' networks and expertise. - Need to get operational fast and generate enough cash to break-even.

Common misconceptions - Bootstrapping means having no external help at all. Many entrepreneurs rely on support from public acceleration programmes, challenge prize money, grants or strategic partnerships to finance their growth plans. - Bootstrapped startups will always stay small. There are many examples of startups who experienced exceptional growth whilst bootstrapping and reached millions in revenues.

The basics

Types Self financing, non-repayable funds.

Examples Personal savings, company income, upfront payments, grants, non-equity programmes, donations, and prizes.

Possible funders Friends and family, public bodies and institutions (e.g. cities, chambers of commerce, national agencies, European Commission), foundations and corporations.

Common startup growth stage Idea or very early stage.

Resources

• The European Startup Network www.europeanstartupnetwork.eu
• European funding and tenders portal https://ec.europa.eu/info/funding-tenders_en
• ReWork: Change the Way you Work Forever (2010) by Jason Fried and David Heinemeier Hansson.

Next steps: preparatory tips

• Leverage your (online) network and find people with expertise who are willing to help.
• Research funds that might be suitable for your business (e.g. from the European Union, see chapter 5).

Scaling story: Eyeo

2011- Present Bootstrapping

Amount N/A

Purpose Professionalising company, team hires, improving software

In short

Country of origin Germany Founded date 2011 Founder(s) Tim Schumacher, Wladimir Palant, Till Faida Sector IT No. of employees 150 Total funding raised N/A

Tim Schumacher, co-founder Eyeo German software firm Eyeo is behind AdBlock Plus, the world's leading online advertising blocker. Eyeo's software has been downloaded more than a billion times since it was first developed in 2006. After some initial seed funding from co-founder Tim Schumacher, the business has grown organically, reinvesting profits into development and talent. Today, despite zero external capital, the company has grown to a turnover of €40 million, 100 million users and 150 staff. Tim explains how he and the team did it.

"It didn't need much,” he says. "Just a couple of hundred thousand euros. I had sold a company and was in a fortunate position so I provided the initial funding.”

From acorns, mighty oaks grow In 2006, programming whizz Wladimir Palant was sick of being bombarded with unwanted online advertising. During his spare time, he wrote a programme that would filter out all the banners and pop-ups. He uploaded his creation to the web so that other users could download it for free. He had no idea that his simple piece of software would be a global hit.

Within four years, AdBlock Plus had become the number one ad blocker in the world, with millions of users. This is when he met serial entrepreneur Tim Schumacher, who was running domain marketplace Sedo.com, which also ran ads on its network. "I noticed that on some occasions ads didn't show up," says Tim. "I wanted to know what was happening." As fate would have it, both entrepreneurs lived in the same city: Cologne, Germany. They met, and Tim was bowled over by the success of Wladimir's side hustle. "I downloaded the plug-in and surfed the web without annoying ads," he says. "I was like, 'Wow! This is amazing. I can't believe I didn't know about this.' We decided to take the hobby and make it a real company." In August 2011, the pair formed Eyeo with co-founder Till Faida, who is now the CEO.

Capitalising on the idea Tim supplied the seed capital to get the startup off the ground, becoming chairman of Eyeo – and its largest shareholder.

Eyeo started life with a major advantage over most startups. "Many spend years and millions trying to get users," explains Tim. "Our user base was already there." Instead, the cash was spent on professionalising the company, hiring a small team, and improving the software itself.

"Our first steps were to expand the user side by moving onto other platforms," Tim says. AdBlock Plus was only available on the Mozilla Firefox browser back then, and needed to be tweaked to run on Google Chrome and mobile. "We spent a lot of time making sure we were available across all the platforms. That's how we gained more users."

At the same time, the software was made more user-friendly: "We made it shinier and easier to use."

The secret to organic growth Eyeo's founding team knew they had to monetise AdBlock Plus to ensure the survival of the business. They came up with a model, which charged big companies a subscription to allow their ads through the blocker, provided they met strict criteria. "We defined an acceptable ad standard that banned the bad but allowed the good through," explains Tim.

"If you're a small company or independent content creator, you get on the whitelist for free. If you're a bigger company, you have to comply with our standards and pay a certification fee to get on the whitelist. That's been our business model and ethical core." This is how the business has grown to generate €40 million in annual revenue.

"We were profitable quickly and could fund entire growth organically, which is rare. And it's fulfilling to have a company without investors."

"It helps us make long-term plays and do things differently, rather than focusing on how we'll get the next round of funding. We could have done a crowdfunding round if we'd needed money but we were lucky that, even today, we can fund ourselves organically."

According to Tim, this model is not only allowing Eyeo to scale, it is also helping to change the online advertising industry for the better. "Even some of the old guard are adopting best practice from our playbook, which is great," he says. "We're changing things."

Flirting with disaster Eyeo has made enemies over the years. Many advertising firms have lost millions because of its blocking technology. Some have decided to fight back: "Over 20 companies have been founded, whose only goal is to circumvent ad blockers and show users ads even if they don't want them," says Tim. "They try to game our system."

Eyeo has also been subjected to six different lawsuits over the years, mainly from media giants attempting to recoup lost advertising revenues. "People didn't embrace us with open arms," says Tim. "We felt like climate change activists in the fossil fuel industry or health campaigners in the tobacco industry."

The most aggressive legal challenge came from Axel Springer, the German publisher. "That has kept us busy from 2013/4 onwards," says Tim. The Supreme Court finally dismissed its appeal last year. "Life has been quieter since then."

Tim adds: "If the battle had come two years earlier, we might be dead now. Our great luck was that industry slept for a long time and the battle started at a time when our revenues were in the multi-millions and we could hire good lawyers to defend the lawsuits. It did cost us millions over the years but it also gave us free publicity, so it all balances it out."

Looking to the future The company has never stopped innovating to meet the needs of a fast-moving industry. It has just launched a new product, Flattr, which allows users to read paid-for content on-demand without seeing annoying ads. It processes micropayments from users in return for using its algorithms to filter out "fake news" so they only see quality, authentic stories online.

Eyeo is also now investing its profits into geographical expansion: "We want to grow in other territories now that our growth is flatlining," says Tim. "We're also looking at more partnerships, diversifying away from a pure consumer play." Mobile is a major market for the company too: "Users are increasingly frustrated by mobile ads but we can't use the same technology [to block them]. We still have a lot of work to do."

Tim has managed to accrue a cash pile and is considering acquisitions for the first time.

"Our percentage rate of growth is much lower than it used to be, so we need to put in a lot more work for the same rate,” he explains. "But there are now other companies in our market we could acquire.”

Only 20 per cent of online consumers currently use an ad blocker, so there is a significant opportunity to win more fans. Ironically, Eyeo has been very successful at using advertising to secure more users. "We thought it was crazy to market an ad blocker but we showed an ad on YouTube saying, 'This could be the last ad you watch'," says Tim. "People have been very receptive to our message."

Scaling story: Carcela

2016-2019 Bootstrapping

Amount N/A

Purpose Develop and prove business model

2019 (planned) Venture Capital

Amount £15 million-£20 million (envisioned)

Purpose Team expansion, inventory, marketing

In short

Country of origin UK Founded date 2016 Founder(s) Dagmawi Belay, Tomasz Sadowski Sector E-commerce No. of employees 10 Total funding raised N/A

Dagmawi Belay, co-founder and chief executive Carcela Dagmawi Belay, 23, started car selling website Carcela with co-founder Tomasz Sadowski in November 2016 and is in the early stages of scaling up the business. It's a challenge he relishes, having worked in startups since the age of 16.

Before making his foray into car selling, Dagmawi was a key player in the growth of aerospace startup Hiddier. The company was sold to a government agency in 2014 for an undisclosed sum although some reports suggest it was in the region of $190 million. Dagmawi said this both gave him the appetite for building his own venture and the capital to do it: the sale left him with "some decent pocket change" for a 19-year-old, he says.

"I come from a household where I had four options growing up: [to become a] doctor, lawyer, engineer or a disappointment," he says. "So I was up against that from a young age. But after the success of Hiddier my parents never moaned about me not going to university again."

He experimented with other business ideas, first launching GrabFood, a food delivery business, in 2015. That company didn't find traction, he admits. "Grocery is low margin. It was always going to have a hard burn rate".

"Then, when we started courting investors, they had already invested in competitors [such as Deliveroo]." It was an “expensive lesson", he adds.

He landed on the idea for Carcela when he took his mum to a dealership to buy a new car. They left empty-handed, feeling short-changed by the whole process. Dagmawi says dealerships will often advertise a particular model online but when buyers arrive at the forecourt they have another model pushed on them.

He explains: "The market is ripe for disruption. The dealership is a stationary object that sells a moveable item. It's a century-old model. Large dealerships may be investing in their operations but they are not changing the overall customer experience or getting the best use from technology. Most give terrible service, yet people deal with it."

The winning formula Dagmawi experimented with ten different business models for Carcela before finding the perfect fit for the market. It is a peer-to-peer service for buying and selling cars that takes out all the hassle for the consumer. The company co-ordinates everything from test drive and vehicle inspection to managing and logging the paperwork with the UK's Driver and Vehicle Licensing Agency (DVLA). Buyers don't even need to see a car before buying, as Carcela can handle the purchase remotely and deliver to their doorstep. The company has notched up all favourable reviews on its website, with customers saying Carcela is "very easy to use" and "reasonably priced".

To date, Carcela has managed the car selling process without taking ownership of the physical car. However, in order to scale at pace, the business will now start buying in inventory. Dagmawi is now on the fundraising trail for the first time. He plans to use his Series A round to acquire vehicles.

"We bootstrapped Carcela in the early days, and now we're changing the model from low capital to capital intensive," he says.

He explains that this means he can offer better service and cheaper prices, as insurance companies will give Carcela more favourable rates if they own the cars directly.

Dagmawi is targeting between £15 million - £20 million in a mix of debt and equity. A significant portion of the money will be going towards hiring more people and boosting the marketing spent to further build Carcela's brand awareness.

Dagmawi tried approaching venture capital firms when Carcela was just at the concept stage but found they were reluctant to engage with him due to a string of other company failures in the sector.

He decided to go it alone and prove the model before trying to raise external capital again. He claims he spurned angel investment and acquisition attempts for the first two years to prove that he could budget correctly and that the business could be profitable.

He toyed with the idea of raising money through crowdfunding in order to show future investors that Carcela had won fans, but he believed he would never be able to raise enough through crowdfunding alone. "We're after more capital than is typically raised through crowdfunding," he says. "We're not opposed to it however. Once we have commitments in place for the Series A, we could leave a portion open for crowdfunding from our customers and advocates."

Now he's proved his business model can work and is making money, he's feeling optimistic about this round of fundraising. "It's been great to prove our model works, where other VC-backed players have failed," he says.

"Hubris played a significant role in their downfalls. We will be very diligent with capital usage."

Get advice Dagmawi advises entrepreneurs to talk to other business owners as much as possible to get tips on where they succeeded and where they failed. He found that entrepreneurs in the US are more willing to give advice than their UK counterparts. For example he asked the founders of Beepi, a firm in the US with a similar model to Carcela, for pointers. The firm went bust after raising over $100 million but the founders were still willing to have a conversation.

However, when he asked two UK competitors why they had closed up shop, neither wanted to share their story.

"Although US players may view you as a rival, you're in a different territory so are not viewed as a threat," he says. “Naturally, this perspective may vary dependent on sector and business type."

Going international Carcela already has partnerships with rental companies that have bases across Europe, and the company is debating whether to go into France in 2019. But for the time being, the UK is Dagmawi's focus. Currently, the company is most active in Glasgow, Manchester and London.

In three years' time, he hopes Carcela will be the consumer's go-to alternative to the car dealership.

"We know dealerships will not be gone instantaneously, but we want to be the other option," he says.

"My ideal scenario is that Carcela does well, the dealerships are on their last legs, and we shall be the dominant player. The industry has to change. Even if we are not the sole player, or even the winner, it has to change."

2.2 Crowdfunding

Crowdfunding is a way of financing projects and businesses through many small donations from a large group of people, in exchange for promises of future goods, services, equity, dividends or other rewards.

Many of us have heard stories of successful crowdfunding campaigns, like German startup Bragi, which raised ten times more than its target amount through a rewards campaign,¹³ or UK challenger bank Monzo, which raised £20 million in two days. However, success is not always guaranteed and depends on a strong product/market fit and good preparation.

The average amount raised per round varies

€10,000 – €20,000 (rewards) €0.3 million – €1 million (debt) €0.5 - €2 million (equity)¹⁵

The duration of the campaign is one to two months on average*, with an additional two to five months pre-campaign preparation time. *The optimal campaign length is estimated at around 30-40 days.¹⁶

The basics

Types Reward/donation (non-equity), debt, equity.¹⁴

Possible investors 'The crowd' (anyone who meets the requirements of the platform), institutional investors, professional investors.

How to meet your investor Primarily personal network (friends and family), pre-existing network and social media, or dedicated online crowdfunding platforms.

Common startup growth stage Any startup stage (but can vary per platform and type).

Resources

• Nesta crowdfunding tools and resources www.nesta.org.uk/feature/innovation-methods/crowdfunding/
• European Crowdfunding Network (ECN) www.eurocrowd.org
• National crowdfunding associations See country profiles in chapter 5
• Cambridge Centre for Alternative Finance European Alternative Finance Industry Report

Good to know

Main advantages - Opportunity to build a network of ambassadors, fans and loyal customers. - Form of business/product validation or proof of concept (the crowd can be useful in testing market fit, iterating on features and harnessing collective intelligence for new ideas). - Can help accessing other forms of financing for future rounds, e.g. through media attention gained. - Relatively quick way to raise funding.

Potential challenges - Requirement to disclose significant business information to the public creates risk of copycats. - No guarantee for success - for example only around 36 per cent of Kickstarter campaigns succeed¹⁷ - and most platforms have an "all-or-nothing model" (no investment if target is not reached within the maximum running time). - Failure is public, and might deter subsequent investors, if it suggests that the market does not exist or is not ready. - Potential pressure from pledgers to meet their demands and deliver rewards on time.

Common misconceptions - The crowd will find you on the platform. It takes a strong campaign with an active marketing strategy to activate an audience and attract potential investors to the platform. - Crowdfunding is an easy route to finance. The amount of time and resources invested in a successful campaign should not be underestimated. A lot of the work happens upfront, including designing a campaign, setting up the platform, and pre-committing investors. Generally speaking, a precommitment of 30-50 per cent of the total goal will increase the success of the campaign.

The investor's perspective

With crowdfunding, everyone can invest in a business. This means that there are many different types of investors and it is important to determine which type of investor you are targeting.

Preparatory tips

• Research national regulations to establish how much funding you can raise and how and where you can raise it.
• Consider which platform is best suited for you. Carefully compare fees, the subscription agreement, the platform's audience and past fundraising campaigns.
• Consider IP-protection.
• Getting potential funders pre-committed can significantly improve your chances of success, for example by committing angel investors to invest through the crowdfunding platform.

"We have been really happy with our fundraising and it is great for feedback," says Lasse. “It enables us to see for ourselves where we can improve our service to customers."

The company has now crowdfunded four times through its platform. It closed a €970,000 round in June 2018.

Branching out Until 2018, Invesdor Ltd has been mainly active in the Nordics. In March 2019, however, the company announced a merger with the leading digital mid-size ("Mittelstand") financier in the German speaking countries, Finnest. Together the two companies will form Invesdor Group, a pan-European digital investment and financing platform for companies of all life stages, from startups to large corporations. The merger is expected to close in June 2019.

"We are very excited and proud to create something completely new in the finance industry" says Lasse. The merged group is determined to become the leading investment platform in Europe. The merger was a good way to scale the business cross-border.

The COO of the new group, Günther Lindenlaub, is looking to expand Invesdor's reach even further: "Together we can serve millions of European investors and organizations seeking funding – not to mention other financial institutions that will benefit from our top tier PaaS and SaaS offering."

"We have divided our business into two areas," explains Lasse. "We have fundraising but we also sell our technology, processes and investment firm license as a package to help other traditional fundraising companies to digitalise their processes."

Invesdor finished 2018 on a high, winning the title of Best Nordic Fintech Start-up in November. Awards aside, enabling the ecosystem is a strong driver for Lasse: "I used to work for an American investment bank and it was a very money driven environment. At Invesdor I can focus on building new things, but also help companies to raise funding and investors to find interesting new opportunities that they could not before. That is important."

Scaling story: Invesdor Ltd

In short

Country of origin Finland Founded date 2012 Founder(s) Lasse Mäkelä, Jouni Leskinen, Lare Lekman, Miikka Poutiainen, Petteri Poutiainen, Timo Lappi Sector Fintech No. of employees 20 Total funding raised > €4.2 million (before 2019)

Lasse Mäkelä, CEO and co-founder Invesdor Invesdor launched in 2012, becoming the first equity crowdfunding platform in the Nordic region and enabling the first IPO of a crowdfunded company, when Finnish company Heeros Oyj listed on Nasdaq in 2016. The company has raised a total of €4.2 million, the majority of which has come from equity crowdfunding on its own platform. Chief executive Lasse Mäkelä shares Invesdor's scaling story.

As a former investment banker, Lasse Mäkelä has experienced fundraising from both sides of the table. Seeing some of the challenges for funders and entrepreneurs prompted him to try and improve the process.

"What bothered me was the need for entrepreneurs to get expensive lawyers and advisors involved in the fundraising process," Lasse explains. "I wanted to digitise the process, making it fair, easy and, importantly, transparent."

The catalyst to turn this idea into a reality came when Lasse was trying to raise funds in another startup. He wanted to enable customers of the company to become shareholders but no one was offering equity crowdfunding in the Nordic region. "We contacted Crowdcube to see if they could help but they were only active in the UK. That is when we decided to found Invesdor," he says.

Lasse and five other friends got together to create the first equity crowdfunding platform in Scandinavia in 2012. The entrepreneur admits it began life as a side-project for the founding team, who kept their full-time jobs, ploughing their own money in to start it off. But it soon became apparent that working on the project in evenings and weekends was not enough and they decided to take the plunge and go full-time.

"We realised we were in the right place at the right time and needed to put in more effort," says Lasse.

"After a year, we got our first external investor, a Nasdaq-listed wealth management company. It invested a little money, which enabled me to move to the business full-time in 2013."

The backer was Finland's Taaleri Oyj, whose management had got wind of this local crowdfunding effort. "This new and growing form of financing is an interesting way to invest in unlisted companies," the company's executive vice president, Karri Haaparinne, said at the time. "Taaleri wants to be involved in developing the service, and thus also carry out its own mission of developing the Finnish capital markets and increasing the Finnish ownership."

Finding that breakthrough moment One of the early challenges for the business was splitting the focus between getting great quality companies on the platform and finding a critical mass of investors. "The first two to three years, we had low volumes but then it started to pick up," explains Lasse.

The team worked hard to create brand awareness. Lasse, with his longstanding career in banking, was the ideal face of the company; he inspired trust in customers and backers alike. At the same time, Invesdor rode the wave of support created by its international crowdfunding peers, such as Crowdcube, which was gaining traction in the UK, and Kickstarter in the US.

"Digitising the investment process was a major trend that helped us," he explains. "Kickstarter was becoming a global phenomenon and people understood that we were similar; just instead of a company's products, you would get shares."

Increasingly, negative perceptions of other forms of finance did not hurt either, he adds:

"You hear many stories about angels and VCs making very hard terms for entrepreneurs, driving valuations down and creating a lot of unfairness in the market."

Invesdor's big break came when one of its early adopters, Finnish cloud-based financial management company Heeros Oyj, listed on Nasdaq. The company had raised €660,000 in equity crowdfunding on Invesdor the year before – becoming the first company in Europe to IPO, having raised crowdfunding.

More than 140 companies have raised around €75 million via the platform. Deal sizes are rising steadily. During the year of 2018, the average deal was worth €800,000 up from an average of €500,000 - €600,000 the year before.

Practising what they preach As drivers and advocates for the burgeoning crowdfunding industry, it only seemed right that Invesdor's fundraising would be done through the platform. Following Taaleri's initial investment into the company, Invesdor embarked on a series of public rounds of fundraising on its own platform, drumming up €1 million in 2015 and €1.2 million a year later in June 2016.

Scaling story: Agroop

In short

Country of origin Portugal Founded date 2014 Founder(s) Bruno Fonseca, Bruno Rodrigues Sector Agriculture/AgriTech No. of employees Nine Total funding raised > €1.2 million

Bruno Fonseca, CEO and co-founder, Agroop When Agroop started its journey, founders Bruno Fonseca and Bruno Rodrigues had a good idea, and lots of passion. It was crowdfunding that let them scale those humble attributes into a fast-growing business which helps maintain and maximise harvests across the globe.

Feeling underqualified might be more prevalent in startup culture than you imagine. Often a small team must embrace an intimidating spectrum of roles, so they can turn a business idea into a business. With management, company structuring, financing, staffing, sales, marketing, accounting, technology, legal, production and more to consider, it can feel impossible.

That sensation is certainly familiar to Bruno Fonseca, who – with his long-serving partner Bruno Rodrigues – co-founded Agroop, a technology company that provides hardware and software to help farmers and agricultural consultants monitor growing conditions, maximise harvest and minimise water and energy waste. Having worked on a rebranding project with a farmer, Bruno Fonseca had found an opportunity to start a business serving the agricultural sector. In short, farmers rarely had access to meaningful data to inform growing decisions. Bruno realised that with a relatively simple app, that challenge could be readily countered.

There was one problem. "We had no technical experience back then," confirms Bruno, with a knowing laugh. "That was a huge challenge, because we both were designers. Usually people will say try to find founders with different backgrounds and different knowhow so they can complement each other. There we made our first big mistake. Or maybe it was a 'lesson'. We cannot say if that was a real mistake, because we are still here. But in the beginning, it was very difficult."

It was 2014, and buoyed up by a modest scholarship from the government of their Portuguese homeland, the pair received €700 a month for one year, to help establish their business.

A design for success The pair of founders had tried wooing investors in the early days, but with agritech being a highly specialised field at the time, the right backers were difficult to find. Many lacked experience, while some wanted a substantial cut of any equity; Bruno remembers offers of €50,000 for a 51 per cent stake in the company.

Undeterred, they looked to a funding option where design experience could give them the edge needed. In 2015 Agroop went to Seedrs to try its popular approach to equity crowdfunding. Reward-based crowdfunding, like that offered by Kickstarter would most probably not raise enough cash because of their type of business. But the same rules that apply to Kickstarter apply, to a degree, to Seedrs. You need a people-facing page that is very well designed.

"Going to Seedrs was a very interesting decision for us," asserts Bruno. "There we tried to find a different approach. And we used our strongest points on that platform. What we did – being designers – was to build a very precise mock-up of what we needed to do. We could communicate our idea very well, and make interesting videos. That was the base from which we wanted to get investment. Making a good video in crowdfunding is very important, and we knew how to do that. We did what we did best at the time."

Certainly, the Seedrs campaign went very well. Agroop were looking for €75,000. Thanks to overfunding, they secured close to €84,000, in return for a 5 per cent cut in the company. It was a considerably better deal than those offered by some of the early business angels the team met with. As the company has grown it has returned to Seedrs twice, and at the time of writing a fourth campaign is underway.

The second campaign came in 2016, when the team hoped to pull in a further €75,008 in order to establish the company's broader operations, including a sales and support capacity. They secured nearly €98,000 thanks to more overfunding. The following year Bruno and his team returned to Seedrs for a third time looking for a more ambitious €200,009; the money would be put to developing the hardware that would become the core of their business. They raised more than double that, tipping the scales at just over €525,000. At the time of writing, Agroop's fourth Seedrs campaign is about to launch.

Stoock Control Before considering how Agroop harnessed the potential of equity funding to successfully scale their business, it is worth taking a look at the changes to that business. Very early on the focus was on an agricultural management app, Agroop Operational. While the app was popular, it did not gain ideal levels of traction. Feedback from farmers said Agroop Operational was useful, but manually entering data was too time-consuming.

"We did something which is very usual for a startup; we pivoted", Bruno remembers.

"Instead of building software or a platform that is very dependent on manual inputs from farmers, we did the very opposite. We started delivering an IoT device called Stoock. The Stoock collects data on five different parameters, so we can basically parenthesise soil moisture and temperature, air temperature and humidity, and the solar radiation with just one device, in a very scalable way. The sensor does not need any cables, does not need a technical team to implement and deploy it, and it is energetically efficient." An app – Agroop Cooperation – was built to accompany Stoock. Crucially, this time the platform presented data, rather than requiring to be fed information.

Community gains Pivoting is famously common in startup culture, but it can rather complicate business roadmaps, financial planning, and so on. Equity crowdfunding let Agroop both scale and shift its shape. Of course, you need to get crowdfunding right to enjoy those benefits. And for Agroop, it is all about community. Building a meaningful community is easier said than done, but Agroop had already done the legwork early on, when the company was making initial contact with investors and pooling insight on the business' viability.

Bruno recommends that at the start of an equity crowdfunding campaign, any business should have around 30 per cent of its backing target already likely to come in from an established investor or contact network. Significant early funding lends any campaign credibility, which creates momentum.

"It is very important," says Bruno of the early days of such a campaign. "It is like a snowball. If you get that initial momentum and initial community right, in the next campaign that community will be very important. That community will still be growing, and your investors and stakeholders will be there to invest more and convince others to do the same."

Equally, the Agroop CEO recommends giving a full month of your time to building the campaign in advance. With the campaign active you will also want to communicate constantly with confirmed and potential backers. Make regular blog updates, invite backers to private message groups or a special area of your website, send newsletters, and generally make your audience feel valued, special and informed. And, at least for Agroop, a degree of vulnerability worked.

"The momentum is very important. And so is transparency," offers Bruno. "People need to understand that you are not only communicating the positive outcomes, but also that you show your struggles. Sometimes you have to make them feel the pain, and show them that you are honest. Occasionally, being vulnerable and showing others our vulnerabilities is very powerful. People can correlate and connect with that."

Equity crowdfunding was not the only financial foundation for Agroop's success. As well as the aforementioned government scholarship, the team spent time on an immersive agricultural accelerator in Italy, which covered expenses, provided €20,000 in cash, and much more significantly for Bruno, provided access to expert insight, experience and mentoring.

As Agroop proves, you do not need a founding team that covers every possible skill the business could ever need to scale successfully, and with equity crowdfunding, your business can evolve as it scales. It is not the only funding option for a scaling-minded startup, but it may be one of the more accessible. And from small acorns grow mighty farming businesses.

Scaling story: Funderbeam

In short

Country of origin Estonia Founded date 2013 Founder Kaidi Ruusalepp Co-founder Urmas Peiker Sector Fintech No. of employees 32 Total funding raised €11.3 million

Kaidi Ruusalepp, Founder, Funderbeam Funderbeam is an innovative marketplace that allows investors to invest in and trade shares of startup and growth companies. Powered by the blockchain, the Estonian startup has attracted 6,500 investors to its platform from 117 countries. Funderbeam has an impressive list of backers, including Skype founding engineer Jaan Tallinn, famous Valley VC Tim Draper, Japanese Taizo Son and Thomson Reuters. Kaidi Ruusalepp, Funderbeam's creator, explains how Funderbeam disrupted a traditional industry.

Kaidi left a long and prestigious career as the CEO & Board Member of Nasdaq Tallinn to start Funderbeam because of her belief that companies and investors deserved a better deal when trading shares in growing companies. As the former chief executive of the Tallinn Stock Exchange, she learned about lack of capital in growing markets, limited liquidity for early investors and the changes of IPO market.

"I decided that after 11 years at the business, it was time to move on," she says. "I wanted to set up a business so I discussed my ideas with friends and people from previous business journeys and Funderbeam came out."

Founded in 2013, Funderbeam enables the funding and trading of global private companies. The exchange uses the blockchain to record investments and transactions. "Investors can invest in early-stage companies without using major intermediaries, which makes our service immediately global," says Kaidi. "That's our core. Speed. Cost efficiency. Transparency."

Kaidi provided €20,000 of seed capital to start building the platform. Having skin in the game was essential to win the trust of Estonian venture capital outfit "We have been very lucky and found visionary investors from Estonia and the UK," says Kaidi. "They understood the pain felt by private investors, who didn't have any liquidity."

It took a lot of money to build the business because it required jumping through multiple regulatory hoops: "It's been expensive," admits Kaidi. "One VC told me that in fintech, it's always the lawyers who get rich." The investment has paid off and Funderbeam is now licensed in UK, covers Scandinavia, Estonia and Croatia and soon will have a business opened in Singapore.

The company has used Funderbeam's own platform to raise funds on three occasions. "We were the first to be a guinea pig," says Kaidi, adding that using the technology helped Funderbeam iron out any glitches in the process.

The first test round at the end of 2015 was very small, only €10,000 to test the system. But all went well and it gave company the confidence to launch publicly in April 2016.

The capital Funderbeam has been raising over the years has been used to boost the team; the startup now has 32 staff. It has also been used for software development: "We didn't just build an app that takes a couple of months to create," she says. Funderbeam does extensive due diligence on the companies that fundraise on its platform. It can take up to six months to get investment campaigns live.

The last round raised through the platform was the most engaging as Funderbeam, asked investors what could they bring to the company besides capital.

"When investors indicate interest we say 'Okay, what else can you do for Funderbeam?'” she says.

"A quarter of investors replied. Some are spreading the word in Finland, others are helping with SEO [search engine optimisation] or events. It was simply heartwarming and a start for the strong community".

Kaidi has been told she would fail many times over the course of her startup journey. "A lot of people didn't believe in us," she says. "VCs didn't believe there would be people who wanted to trade early-stage companies." The entrepreneur has proved the naysayers wrong: there are currently 30 companies trading on the platform.

More fundraising is on the cards: "It's difficult to know how much more money we will need to raise," says Kaidi.

"If we attract the necessary volumes, then we'll need to invest more aggressively. If we go slowly, we can use at one point our revenue stream and move market by market."

Her plans for the future: a listing on Funderbeam exchange, "if all goes well", she says. But that's a long way in the future: "We aren't thinking about exit. It's about focusing on the business."

2.3 Angel Investment

Angel investors, also known as business angels, invest their own money in early-stage businesses for a share in the company. They can invest alone, or as part of a syndicate (a group of angels).

Angel investors are notoriously difficult to track down, but it can be worth the time and effort: angels can add great non-monetary value to a deal, like expertise and access to networks. Business angels tend to receive many business plans, so be sure to understand their unique requirements and processes beforehand, and tailor your proposition to potential investors.

€180,000 Is the average angel investment per company (2017)¹⁸ in exchange for a minority stake (usually between 10-25 per cent) ¹⁹

A deal typically takes between two and six months ¹⁹

The duration of partnership is typically between three and eight years ¹⁹

The basics

Types Equity and debt.

Examples Equity shares (ordinary or preference, see section 1.3), promissory notes, convertible notes (see glossary).

Possible investors High net worth individuals, angel investor syndicates, friends and family.

How to meet your investor Personal and professional network, investment matchmaking platforms (online and offline), angel directories, events.

Common startup growth stage Early or seed-stage startups.

Resources

• European Business Angel Network www.eban.org
• Raising Business Angel Investment: European Booklet for Entrepreneurs (2013) by HBAN and EBAN.
• The Invested Investor: The new rules for start-ups, scale-ups and angel investing (2018) by Peter Cowley.
• Siding with the Angels: Business angel investing - promising outcomes and effective strategies (2009) by Nesta and UKBAA.

Good to know

Main advantages - Midpoint investment between small investment needs and larger venture capital funding needs. - Flexible and agile way of working - business angels do not work with the same limitations as VCs. - More likely to receive funding in a later VC round.

Potential challenges - It can be difficult to find the right angel investor who shares your business vision and supports your growth strategy, and with whom you can form a personal connection. - Lack of formal structure can cause delays in payment or lengthen the fundraising process.

Common misconceptions: - Angel investors 'have all the power'. Deals are negotiations and there is no compulsory form as to what the deal terms include. The founder-angel relationship depends greatly on the type of angel investor and the startup's needs. Angel investors usually only ask for a minority stake.

The investor's perspective

It is important to keep in mind that angel investors are individuals who invest from their own pockets, and don't manage funds on behalf of others. They may be under less time pressure compared to other private equity investors and more willing to hold investments for a longer time period.

Business angels are usually actively involved with assisting the founders of the businesses they invest in with their own network connections and sector expertise. They tend to spend time with the founders, even on a day-to-day basis, to structure the business to scale, to service large clients, to enter new markets and geographies, to integrate the core team with talented human resources, etc.

Angel investors usually invest at a very early stage of the company's life cycle (often even pre-revenue). They typically look to invest in businesses that offer solutions to real problems, that have potential to scale, to which they can add value in addition to the funding provided, that they can exit in the next five to ten years, and that are being led by entrepreneurs with excellent industry knowledge and execution skills.

Preparatory tips

• Use your network to identify potential angel investors or networks of angel investors.
• Prepare a clear proposition, including a well-documented growth plan and how the investment is to be used.
• Whilst criteria will vary, many angels will look for a ten-fold return on initial investment within five years, and want an exit strategy which allows for this.
• Check if there are any fiscal incentives for business angels in your country and eligibility for tax breaks; if so, then doing background research or preparing mock-up forms may give you a competitive advantage. The Compendium of Tax Incentives published by the European Business Angel Network (EBAN) can help.

Cloudalize

Scaling story

2010-2017 Angel Investment

• Amount: €5 million
• Purpose: Team expansion, technology development

2018 Venture Capital

• Amount: €5 million
• Purpose: Team expansion (sales), geographical expansion

In short

• Country of origin: Belgium
• Founded date: 2010
• Founder(s): Benny Willen, Jeffrey Meesemaecker
• Sector: IT
• No. of employees: 28
• Total funding raised: €10 million

Benny Willen, co-founder Cloudalize

Cloudalize gives users anywhere in the world the ability to run power-hungry graphics on any device through its Desktop-as-a-Service Platform, MyGDaaS. Funded by friends and family in the early days, the startup also raised a major venture capital round in 2018. Co-founder Benny Willen explains how his choice of fundraising helped the business to scale.

A tale of personal sacrifice

There's no denying the drive and commitment of Benny Willen and his co-founder Jeffrey Meesemaecker. The pair didn't pay themselves a proper salary for seven years while building Cloudalize, so great was their belief in the technology's potential to change the world.

Cloudalize delivers GPU power on-demand, and is used by engineers and information architects to run energy-hungry graphics and more on devices that should not be able to sustain that level of processing power. "Smart technologies are enabled and delivered by our full-stack platform," says Benny of the company he co-founded in 2010. "It's powerful, instantaneous and hassle-free, regardless of purpose, device or location."

For Benny, going without a wage for such a long time has not been easy. "It's been a tough, hard journey," he admits. "I drove a very cheap second-hand car and we live in a small house and buy clothes at the cheapest stores." Despite these sacrifices, Benny has the full support of his wife and two children. "I wanted to realise this dream," he says. "It's been very important to me."

Jeffrey and Benny have been friends since their college days, when they launched an accidental startup – a gaming forum – from their dorm room. But Benny's career took a very different course after university. He joined the family business – a small construction firm. "I did that for four years," he says. "It was the most difficult period of my life. I would lie awake at night feeling I was wasting my life away."

He found the courage to quit, and became an innovation consultant, working with big companies on major transformation projects. But then a chance conversation with Jeffrey led to the pair collaborating once more.

Benny says: "The best thing you can do is start a business if it's in pursuit of your dreams."

Financing the dream

Like many founders, Jeffrey and Benny invested all their savings into the nascent startup. It was more of a side project in the early days but the pair soon realised that Cloudalize had global reach. "When our money was depleted we wanted to continue, so we had to raise external capital," Benny explains. "That's actually the reason why we officially started the company. Before that it was a project, not an official company, but to raise money from family, friends and fans, we had to create Cloudalize."

Raising capital dominated the whole of 2010, Benny reveals. "Most of my time in the first year of the company was spent fundraising. It was the most time-consuming thing you can imagine.

You make a list of everyone you know and call them up. People are super-supportive and then you ask them to invest and suddenly your emails aren't getting answered and people stop answering your calls. They come back with every kind of excuse for not investing. I've heard them all." Nevertheless, Benny says that entrepreneurs should never shy away from raising finance from their personal network.

"I know some founders who are hesitant about raising money from friends and family because they are worried about damaging the relationship if things go bad," he says.

"But in my case, I was so convinced by what we were doing that I thought: instead of making a large investor very rich, I will make my family and friends very rich. It was a positive way of looking at things."

However, he advised his friends and family to invest only a small proportion of their available capital. "People that really trust you sometimes try and invest half of their savings," he says. "I'd say, 'No, you're crazy'."

Cloudalize executed three rounds of funding with these angel investors, raising a total of €5 million. Each round was easier than the last, according to Benny. "Every three months we came together with all of our investors to give them an update about the business. During these meetings, personal trust grew, as did their familiarity with our business and team. They started introducing us to other investors, saving us a lot of time.

"It's paradoxical but the time you invest in fundraising as a founder is very high at the beginning and then becomes less and less."

All of the capital was invested in people and technology, says Benny. Cloudalize has to pay high salaries to find people who understand its deep technology. "It's so hard to find the right people," says Benny. "There's a war for talent." The company now employs 28 people across its offices in Belgium, UK, US, Romania, and the Netherlands.

"We are forecasting to grow the team to more than 100 people by 2022."

Securing venture capital

In November 2017, Benny attended Slush, a startup event in Helsinki, and had the opportunity to pitch to a room of 80 investors. One of them was a representative of Horizons Ventures, the Hong Kong investor. "He came up to me after the event and that's how we raised the round," says Benny.

"When you look for money, you want investors who believe in what you are doing. I would not say I chose Horizons, I would say they chose us."

Cloudalize raised a further €5 million through this round, which will be used to bolster its sales team and to continue its geographical expansion. Venture capital was the natural next step for the business, Benny says: "There is a sequence in funding. You can't go from starting a company to closing your €5 million VC round. That's not happening."

Benny had considered other sources of finance, but his business was seen as too high risk by traditional funders.

"Along the way, I hoped that a bank would be willing to fund us," he says. "But that was absolute nonsense."

The next step for Cloudalize will be to court private equity investors, he reveals: "But we're not at that stage yet."

This latest fundraising means that Benny can finally pay himself a salary. It's a major turning point for the pair. "My wife also has entrepreneurial dreams," reveals Benny. "I can now pay myself a wage and support her. She can lean on me now...

Ada Health

Scaling story

2011-2016 Angel Investment

• Amount: €20 million
• Purpose: R&D, test market-fit

2015 Grant

• Amount: €2.4 million
• Purpose: R&D

2017-2018 Venture Capital

• Amount: €40 million
• Purpose: Team expansion, build partnerships

In short

• Country of origin: Germany
• Founded date: 2011
• Founder(s): Dr. Claire Novorol, Daniel Nathrath, Dr. Martin Hirsch
• Sector: Healthcare
• No. of employees: 135
• Total funding raised: > €60 million

Doctor Claire Novorol, co-founder and chief medical officer Ada Health

Ada Health was started in 2011 to improve clinical assessment and provide easier access to healthcare. The Ada smartphone app gives people access to an artificial intelligence-powered "doctor" that can give feedback to those feeling unwell. The Berlin-headquartered company, which also has a base in London and employs over 135 people, has raised over €60 million to date and is using the money to expand worldwide. More than 10 million health assessments have been completed since the app launched in 2016 and Ada has been ranked the top medical app in over 130 countries. Here, Claire explains why having the support of patient private investors gave them the time needed to develop their proprietary technology platform from the ground up, putting it through repeated rounds of testing and iteration before launch.

The beginnings

The World Health Organisation estimates that half the world's population still lacks access to basic health services. Ada Health is on a mission to solve this problem, aiming to use technology to give everybody easier access to quality healthcare.

Doctor Claire Novorol, a former NHS doctor specialising in paediatrics and genetics, met her two Ada co-founders when she was finishing off a PhD in neuroscience at Cambridge University. Her time at the University, home to a lively startup scene, convinced her to take the leap into entrepreneurship. "There's an amazing ecosystem in Cambridge that gives people an insight into what it takes to build a business," she explains.

Claire began developing ideas in health tech and around that time met her business partners - Daniel Nathrath and Martin Hirsch - who were working on a digital medical platform. Claire was able to provide expertise as a doctor and ended up becoming a co-founder of the business that later became Ada Health.

Scaling up the business

Claire and her team were able to fine-tune their idea over several years because of the support of patient investors. Co-founder Daniel Nathrath's experience with startups and technology companies in Europe means they had "a solid standing" with angel investors from their work together at a previous company.

The firm's early angel funding came from German private individuals who understood it would take time to develop a concept that was exactly right for the market. "Our investors believe in the team and understand our industry well, including the complexities involved in developing a health AI product like ours, so they were happy to be patient and allow us to take the time needed to build a truly industry-leading platform", Claire explains.

According to Claire, if the business had taken on venture capital (VC) funding in the early stages, it could have created pressure to focus too early on short term financial targets rather than on developing and refining the core technology, which is especially important when dealing with healthcare products. "This meant our focus could be on R&D in the first years and ensuring the quality of our product"

Word spread amongst the wider network of Ada's original angel investors, and more backers joined the consortium as the business required more capital.

"Our early investors played an important role in our development. They are well connected in Europe and globally, and they've been very supportive of us throughout our journey, including helping to make connections for us across their network."

Did the founders ever consider moving the business to the US in the early days? Claire says not; they had already built a world-class core team in Berlin and the city gave them access to a tremendous talent pool in Europe due to its proximity to some of the most prestigious universities and medical institutions in the world. For tech startups, being based in Europe can also be more cost effective as engineers and data scientists are significantly more expensive to hire on the west coast of the US.

"We had so much knowledge and experience here, we didn't want to move the company to the US – although we have opened an office there. There may be a perception that it's essential to start your company in the US, but we saw the opportunity here." says Claire. She adds that access to finance is now improving in Europe. "I'm heartened by the fact we're seeing the ecosystem mature here, and that there's more money available. It's on the right track."

Changing the focus

By the time the app was launched in 2016, Ada had transformed from a healthcare platform, designed to be used by doctors, into a service that could be used by the everyday consumer. The name Ada was picked because it's friendly and memorable, has the double meaning of "aider" or little helper, and is a nod to star computer programmer Ada Lovelace.

Once Ada had gained traction in the market, the company was able to secure a further €40 million in venture capital since October 2017.

Claire explains: "We were a small team for the first few years, and we were strategic with how we invested in our resources. Once we launched our consumer facing product and started to see the tremendous global impact we could truly have, we knew that the time was right to bring in institutional capital."

Whether you're trying to raise seed funding or an institutional round of investment, the challenging part, Claire says, is that raising money requires patience and investing capital strategically. We have ambitious goals, but we're really fortunate to have investors on board who are supportive of our global ambitions and are willing to go on that journey with us".

The long journey to market-fit was worth the effort: the app has won critical acclaim, being ranked the top medical advice app in scores of countries. On the Apple and Google Play stores, the Ada app has been given a ranking of 4.8 stars out of five from over 150,000 reviews. "It's always been spot on accurate. It's better than waiting weeks for an appointment if it's not necessary," says one reviewer. To be clear: Ada cannot give a formal diagnosis due to strict regulations. The app recognises patterns based on other people's symptoms and experiences, and draws upon an extensive knowledge base covering thousands of conditions, symptoms and findings. Users can then present this information to the right medical professional.

The benefits of co-founders

Claire says there are multiple benefits to having co-founders, rather than going it alone. It meant that one could concentrate on building the business and pitching for funding, leaving the others to concentrate on the more technical aspects of developing the product.

"Even though we were all involved, we didn't all have to focus all our energies on that. For Daniel, who led the process as chief executive officer, it was of course very time consuming at times."

This also meant that the other founders could focus on their areas of expertise. "Investors base their decisions on the strength of the founding team, as well as the quality of the technology and the potential of the business model, so Daniel, Martin and I each had a vital role to play", explains Claire. The key to a successful business partnership, she adds, is for the founders to remain aligned to make sure the business moves in one direction.

How the business model works

Ada doesn't charge people to use the app. Instead, the business makes money by partnering with health providers and corporations. Medical professionals benefit from the service because Ada saves them time and does a lot of the legwork. For example, a recent trial with the National Health Service (NHS) in the UK found Ada's assessment saved GPs roughly two minutes per consultation. Claire says the company is also working with insurers that want to route patients to the right care faster. When customers are pushed into the wrong treatment, it is costly for both insurers and health providers. The firm is also working with governments, NGOs and local authorities in multiple markets.

The future

There is a lot of consolidation and acquisition in the medical industry. However, Ada does not have a specific exit plan in mind right now. "Our focus is on our purpose, not on a potential exit", says Claire. "There's a lot of building and development and growth to focus on and that's what we currently spend our time thinking about and working on". For now, Claire's focus is on continuing to extend Ada's reach and pushing the app into more countries. The app is currently available in five languages: English, German, Spanish, Portuguese and French. Swahili will soon be an option because the company wants to push into east Africa, where it already has a partnership with the Bill and Melinda Gates Foundation and Fondation Botnar. Claire also wants to launch services in other widely spoken languages, for instance Hindi. She says: "If you live in rural Africa or India it might be a two-day journey to see a doctor. But if you have a smartphone and can get access to world class expertise immediately, that will transform lives. I think that's a huge opportunity."

2.4 Venture Capital

Venture capital is a form of investment for early-stage, innovative businesses with strong growth potential. Crucially, VCs also offer non-financial support to help a business commercialise and grow.20

The past five years saw a nearly five-fold growth in European venture capital investment.21 Whilst founders are sometimes hesitant to give away equity, the potential size of the investment coupled with professional strategic advice make this a common route for startups with grand scaling ambitions.

Corporate Venture Capital

Corporate Venture Capital (CVC) is growing globally, both in terms of deals and the amount of capital invested. Numbers of active corporate venture investors globally tripled between 2011 and 2017.22 In Europe, CVC investors participated in 8 per cent of all VC deals but this is expected to grow, especially as more US and Chinese corporates enter Europe.23 The global deal share to European companies was 17% in 2018 (a 3-year low).24

CVC differs from conventional VC in some significant ways. The benefits for startups, besides investment, may include access to the resources, reputation, market insight and network of an established organisation; there is also evidence that a global corporate investor can help startups export or expand internationally. CVC teams may be more concerned with strategic fit and potential future acquisition, and less concerned with a rapid exit.

See Nesta's Scaling Together report for more information about working with corporates, and common mistakes that smaller partners make.25

The investor's perspective

Robert Bosch Venture Capital GmBH (RBVC) - the VC wing of the Bosch Group - has been working with tech start-ups for a decade. Individual businesses can receive up to 20 million euros, as well as access to know-how and contacts. 6 to 10 startups (selected from over 2,500 applications!) receive an investment each year. Apart from looking for a healthy return on the capital it invests, RBVC is eager to help develop new technologies. The investment strategy focuses on complementary technologies or on business models that fit particularly well with the Bosch Group portfolio.

RBVC regularly creates contacts between young companies and Bosch operating units: start-ups may ultimately become a supplier, technology partner, or even customer of Bosch. This "open innovation" approach selectively involves external partners in a company's own innovation process. It means that each party can benefit from the other's experience and know-how. This business model produces numerous win-win situations. "We are a tech investor and, as such, we often discuss highly complex technologies with start-ups," says Dr. Ingo Ramesohl, Managing Director at RBVC. "We are also prepared to take on the financial risk of investing in such technologies."

The basics

Types

Equity and debt.

Examples

Equity shares (ordinary or preference shares, as explained in section 1.3), promissory notes, convertible notes (as defined in the glossary).

Possible investors

• Investment/VC firms: firms that pool together money from institutional investors like investment banks, insurance companies, pension funds, universities and other financial institutions (in a fund managed by General Partners).
• Corporates (see "Corporate Venture Capital").

How to meet your investor

Many VCs rely on personal networks and relationships, so third-party introductions can be useful. However, some will also be receptive to unsolicited approaches, and may use networking events, meetups, demo days, accelerators, pitch competitions/challenges or brokering platforms (e.g. www.euroquity.com) to find prospective investments. The right lead investor can help bring other investors on board.

Lead investors

Many VC rounds are composed of multiple investors. However, one investor typically takes the greatest stake and the greatest responsibility for structuring the deal. This lead investor is usually an experienced investor who shows real conviction in the startup and helps give confidence to other investors. He or she may sometimes represent all the investors during negotiations and potentially also on the board. Finding the right lead is thus important.

Common startup growth stage

Seed, early to late-stage startups.

Venture Capital, like Angel Investing, is a subset of private equity - a broad category which includes all equity capital that is not publicly listed or traded.

Preparatory tips

• Prepare three key documents to show to interested VCs (look for model documents, e.g. BVCA).
• Executive summary with a high-level overview of the company.
• In-depth assessment of the business, usually in a PowerPoint or pitch deck format.
• Operational Financial Model that quantitatively illustrates how you anticipate the business to grow.
• Shortlist potential funding opportunities.
• Identify potential VCs: first within your existing network then outside
• Check if their alignment meets your needs: partners, location, sector focus, stage preference, culture, track records (VC portfolios), etc. Valuable resources include CB Insights, Crunchbase, PwC Money Tree reports, and PitchBook.
• Make contact: physical introductions or third-party introductions are preferable. However, an increasing number of VCs now have contact forms on their website.
• Prepare for investors' due diligence.
• Prepare entourage (team, professional references and network) to be aligned with your business idea and investment strategy.
• Prepare a solid five to ten-year business plan and growth strategy with proven product-market fit (or ability to demonstrate knowledge of market/product/customer trends).
• Have a clear exit strategy, e.g. plans for a trade sale or initial public offering (IPO). Focus on positioning and attractiveness of the business to potential future acquirers or public market investors.

Resources

• Invest Europe www.investeurope.eu
• The European Investment Fund www.eif.org
• Venture Capital, Private Equity, and The Financing of Entrepreneurship: The Power of Active Investing by Josh Lerner, Ann Leamon, and Felda Hardymon
• Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
• British Business Bank's Finance Hub www.british-business-bank.co.uk/finance-hub/
• British Venture Capital Association www.bvca.co.uk e.g. see Venture Capital Explained or search for model documents for early stage investments

Good to know

Main advantages

• No intermediaries.
• Global investor reach.
• Speed and flexibility.
• Possibility to avoid dilution of ownership.
• Additional value of network.

Potential challenges

• Security concerns for both investors and entrepreneurs (e.g. risk of project or digital wallet being hacked).
• Regulatory hazard for entrepreneurs.
• Little to no professional advice from investors.
• Low professional networking opportunities.

Common misconceptions

• An ICO is fast and cheap. ICOs can take as much time as other funding rounds, and legal fees may approach those of a small IPO. ICO costs may be as low as $60,000 but up to $500,000 on the high end.35
• Once the ICO is done, the fundraising work stops. In fact, if the ICO is successful, it is only the beginning of the project (see post-campaign steps). The aim of these post-ICO processes is to increase the value of the tokens. The more they are valued, the more sustainable the startup is, and the more it will raise in the next ICO round.

Glovo

Scaling story

2015 Angel Investment

• Amount: €140,000
• Purpose: Launch service

2015 Venture Capital Seed round

• Amount: €2.2 million
• Purpose: Expansion, improve technology

2016 Venture Capital Series A

• Amount: €5 million
• Purpose: Consolidate market presence, improve technology, build out platform

2017 Venture Capital Series B

• Amount: €30 million
• Purpose: Strengthen market position, optimise technology

2018 Venture Capital Series C

• Amount: €115 million
• Purpose: Team expansion, optimise technology and platform

2019 Venture Capital Series D

• Amount: €150 million
• Purpose: Grow tech team and expand groceries offering.

In short

• Country of origin: Spain
• Founded date: 2015
• Founder(s): Sacha Michaud, Oscar Pierre
• Sector: Delivery
• No. of employees: > 1100 globally
• Total funding raised: €300 million

Sacha Michaud, co-founder Glovo

On-demand delivery service Glovo launched in Barcelona in 2015, challenging the likes of Amazon with delivery times of 35 minutes for a range of different products. Active in 124 cities across 21 countries, Glovo's fast growth has been powered by venture capital investment of €300 million, raised from Lakestar, Drake, Seaya Ventures, Cathay Innovation and Rakuten Capital. Here co-founder Sacha Michaud shares Glovo's story.

Sacha Michaud, co-founder of on-demand delivery platform, Glovo, has always had an entrepreneurial streak. He started selling popcorn at a fair when he was nine years old. But it was a somewhat different early career that he credits for his business smarts.

"I became a jockey when I was 16," he explains. "It was good because I ended up being much more mature than other people my age: being out there, hustling and dealing with owners, trainers and agents, I learned to be business savvy, which has been really valuable to me."

His career as a jockey took Sacha to the UK and US, until he finally moved to Barcelona in the late 90s, where his mother was living. "I fell in love with the city," he says. This is when his career took a new turn: he learned to programme, and founded social media site LatinRed. This gave Sacha a taste for startup life. He sold the business to a Nasdaq-listed company and joined nascent betting site, Betfair. He spent nine years growing that business before deciding he was ready to go it alone once more. "I was interested in launching something in the delivery space and someone introduced me to my co-founder Oscar [Pierre], who had the same idea."

Getting Glovo off the ground

The pair decided to launch Glovo together in January 2015, with headquarters in Barcelona. Oscar had already lined up an angel round of €140,000 when the pair joined forces. "That money meant we could take our first order in March," says Sacha. The concept for Glovo was simple: you can order things on your smartphone and they will arrive in around 30 minutes via a courier (or a "Glover", to use their official term). "It was really straightforward and customers liked us," Sacha says. "We didn't have money for marketing so word of mouth was great and growth was explosive. In the summer of 2015, we did another seed round of €2.2 million which let us launch in other cities." The round was raised from a consortium of investors, including Cube Investments. It enabled the startup to keep improving its technology, evolving from a simple text box for taking orders to a more user-friendly platform.

"I'm a firm believer that if we hadn't started the way we did and got the viral traction, we wouldn't be here today," says Sacha.

From nappies at 2am on a sleepless night, to an emergency Big Mac on a Sunday morning - Glovo offers an endless range of products at the touch of a button. "The fact that we can bring anything in the city is huge," explains Sacha. "It makes us more sticky for customers and thousands of orders are processed every day - we're a part of people's lives."

A game changing move

This early growth spurt was quickly followed by an important realisation for the founders – while their service was popular – it wasn't particularly scalable. "After a year and a half, we turned into Glovo 2.0, signing agreements with restaurants, shops and stores to integrate them into the app," says Sacha. "It meant orders went straight to retailers, making it a more seamless process."

"Suddenly that changed the dynamics, making the business more scalable and more economically viable once we began charging partners a small commission on orders," he adds.

Now, an army of freelance delivery riders receive their orders through the Glovo app, making the whole process as easy as possible - the challenge now is maintaining a decent level of orders. "The higher volumes the better," says Sacha. "That means more liquidity and shorter distances between deliveries. We don't want our people standing around not making any deliveries."

Glovo is now available in 124 cities, across 21 different countries and with more than 5.5 million unique users, it has serviced over 23 million orders. "Most of that growth happened in 2018," explains Sacha. "We're in Africa, Southern and Eastern Europe, now Latin America is a huge growth opportunity for us. We move into markets that aren't too saturated and where we can offer an advantage." This strategy has meant Glovo is less interested in the UK and US, where Sacha says it is too competitive, due to the presence of various other rapid delivery firms. "The cost of arriving late is high," he adds.

A lean approach to investment

Having started off with angel and seed rounds in 2015, Glovo has since completed three further investment rounds, closing its latest Series C round worth €115 million in July 2018, with the likes of Seaya Ventures, Cathay Innovation and Rakuten Capital. "That put us on the map and allowed us to build up our technology team with world class resources - bringing them to Barcelona," explains Sacha. The company has raised €150 million in total - a purposely modest amount according to the co-founder.

"We've been very lean and executed with a lot less money than competitors when they were at our level at volumes," Sacha explains.

"We have to be very efficient with marketing and the tech team. We would have liked to hire a lot more engineers in the past but being lean makes you execute quickly."

The focus has now shifted to significantly growing the tech team.

Part of a global debate

With its fleet of freelance workers, Glovo has found itself part of the burgeoning gig economy and the debate that surrounds it - something Sacha is keen to have a voice in. "The economy is changing. The way people want to work is changing. It's a dynamic environment that couldn't exist ten years ago when the technology wasn't available," he says. "We want to be part of the debate. The solution is probably not a labour contract or a freelance contract but something in between."

Glovo is also intrinsically linked to the evolution of cities, helping to get cars off the streets and giving local shops a way to fight back against the mighty Amazon. "We give them a competitive advantage - even at its quickest Amazon takes two hours - our deliveries take 35 minutes," he says.

Managing scale

Looking to the future, Sacha pinpoints two big priorities: finding further growth in existing cities and looking for new opportunities. "We want to demonstrate we can be profitable in mature markets too. We're already seeing that in Southern Europe."

Of course, managing growth has its own challenges. Glovo has around 900 employees across its various markets, so maintaining the strong company culture across borders is a focus for Sacha.

"Hiring good senior management is crucial to creating a business that can scale quickly," he explains.

"Being able to share our core values is part of that. We've been lucky with hiring and our organisation is still very reactive. It's all about the team at the end of the day. I've never seen any company excel without a great team."

In April 2019, after the interview with Sacha, Glovo announced a Series D round. The press release reads: "Glovo continues to scale rapidly and we have big ambitions for this round of investment. Our main priority is to invest in our people - our team have been fundamental to our success to date and as we grow we need an even bigger team of engineers to meet the demand we're experiencing."

Fishbrain

Scaling story

2013 Angel Investment

• Amount: $150,000
• Purpose: Development, attracting users

2014 Venture Capital Seed round

• Amount: $2.4 million
• Purpose: Development, attracting users, scale

2015 Venture Capital Series A

• Amount: $8 million
• Purpose: Enter US market

2017 Venture Capital Series B

• Amount: $3.7 million
• Purpose: Hire staff, geographical expansion

2018 Venture Capital Series C

• Amount: $13.5 million
• Purpose: Growth

In short

• Country of origin: Sweden
• Founded date: 2012
• Founder(s): Johan Attby, Jens Persson, Marcus Fransson
• Sector: Social network
• No. of employees: 52
• Total funding raised: $27.8 million

Johan Attby, founder Fishbrain

Serial entrepreneur Johan Attby is the founder of Stockholm-based Fishbrain, the world's leading social network for anglers. The platform was launched in 2013 and has been funded by venture capital, raising a total of $27.8 million. Johan explains why this funding route was ideal for his business model, and shares the secrets to his scale-up success.

Fishing is the biggest sport in the world, reveals Fishbrain founder Johan Attby. "Sixty million Americans go fishing each year," he says. "More people go running but runners spend a fraction of the amount on their hobby that anglers do."

Johan stumbled upon this fact by chance back in 2012 while reading a Forbes article. At the time, he was on the hunt for his next startup idea. His most recent venture, Tific, a B2B IT firm, had been acquired and he was serving out a year's "earn-out" deal in Bedford, MA. "It's very typical," he explains. "I was locked in for a year and a half. During that time, I realised I didn't want to stay with the acquirer."

Johan knew that he wanted to create a new social network that centred on a hobby or passion. "I'm a big fan of companies where you can crowdsource data and turn that into a valuable service for users," he says. He wrote a blog post, claiming that the time was right for this kind of "deep social network".

"I got a tonne of feedback from Silicon Valley investors," he says. "So I decided to create a company."

He wasn't sure which passion to focus on; the Forbes article prompted a light bulb moment. Fishing is a sport that lends itself well to a social network because of anglers' fondness for posting pictures with their catch.

A scaly venture

Johan decided to move back to his native Stockholm to launch Fishbrain, which was incorporated at the end of 2012. He considered staying in the US but software developers in Silicon Valley command "astronomical salaries", which was a problem as Johan was on a tight budget until he could raise external funding. "I financed the business in the beginning."

In Johan's view, venture capital was the only realistic funding option for the startup, because of its model: build first, monetise later: build first, monetise later. "I knew from the beginning that we would need substantial venture capital backing," Johan explains. "With a social network, there is no way to monetise before you hit a critical mass of users. Users pay for access to data and without the data, we had nothing to sell. So, for the first three years, we had zero revenue. Venture capital means you don't have to monetise immediately; you just have to know how you're going to do it.

"We raised our seed round on the vision alone," he adds. "But I had to do a lot of educating and take investors through the market size. Not many people realise how big it is. I had no clue either until I researched it."

The sports fishing industry is worth an estimated $48 billion in the US alone, he claims.

Reeling in the first investors

Fishbrain secured a seed round of $150,000 from Swedish angel investors in 2013. It was not a struggle to secure meetings with these initial backers, as Johan was not only a proven entrepreneur who had raised venture capital for his previous outfit, but was also an angel investor himself at the time.

"It is always easier to raise money when you've done it before," he says. "I had started and sold a company before so it was easy for me, with my proven track record."

Then, in 2014, Fishbrain landed a meatier seed round of $2.4 million. The round was led by Northzone, the technology investment firm behind Spotify, and pulled in venture capital from GP Bullhound, Industrifonden and Active Venture Partners. All of the seed capital was ploughed into development and attracting users: "We spent the first couple of years building the platform," says Johan.

"We were not the first to go after this market opportunity but we were the first to scale. When building a deep social network, the market dynamics are brutal. There will be one winner and everyone else will fail."

During the first few years, Fishbrain was focused on just one territory. Johan explains: "Even though we were based in Sweden, we decided to go for the US to begin with because it was the most important market to win. All our marketing spend was for the US." This is why, when it came to raising his Series A, Johan looked beyond Sweden's venture community for the first time.