Nine Insights into Seed Funding in Europe - Neil Lewis, Media Modo

Nine Insights into Seed Fundraising in Europe – Neil Lewis, Media Modo

Seed fundraising in Europe is exciting and hot – but how do founders tackle seed raises and suceed?

Nine Insights into Seed Fundraising in Europe

I’ve been building a ‘landscape’ for seed fundraising and capital investment for the European founders that I work with – and these night insights are based on this work.

I’m focussed on Seed investment for two reasons:

  • Firstly – I work with experienced founders or contractors who can’t build a business on pre-seed investment size and
  • Secondly, the founders I work alongside don’t have the time or inclination to join an accelerator or venture studio.

Let’s start with some definitions: Seed funding raises between €1millon and €3million Euros.

Seed funding follows *pre-seed* or angel investing – which raises between €100,000 and €500,000;

…but comes before Series A investment which typically raises €6 to €12million.

So, let’s get started;

Insight number ONE. European Seed Fundraising is hot!

The number of VCs openly raising European focused Seed funds has grown 479% according to our research.

The number of funds that raise new investment money each year has grown from an average of 2 per year to an average of 14 per year over the past three years.

This figure, obviously, doesn’t include US or Asian funds that now include Europe in their focus, nor does it include funds that don’t declare their fund raises, such as corporate VCs.

So, focus on the growth, not the absolute number.

In comparison with *seed* the increase in European *pre-seed* Venture Capital fund raises has only increased by 100% from a measly average of 1 per year (2016 to 2018) to an average of 2 per year (2019 to 2021).

(Note also, I have prorated 2021 based on funds raised data by August 2021)

European Seed Fundraising is hot!

Hence, it is in the European Seed investment space that funds are available and VCs are active!

Of course, much of the pre-seed investment space is dominated by Business Angels and accelerators and they often don’t publicise their funds or capacity to invest – so it’s a much murkier sector.

Hence, don’t discount the opportunity to raise pre-seed. However, understand that you’ll be working with Business Angels primarily, whereas European Seed investment is now Venture Capital firm dominated.

In fact, from my research, it is clear to see that some of the larger Business Angels have now formed or joined Venture Capital firms.

Which leads us to:

Insight number TWO. It’s not who you know

Seed fundraising investment is *not* driven by secret deal flow nor is it based on who you know.

Instead, Seed VCs are often collaborative and share investment with other VCs.

This, of course, helps share risk and give VCs exposure to a wider spread of deals but equally, it results in a kind of group think mentality.

If I had to categorise this approach, I would call it a ‘momentum’ investment strategy (more on this shortly).

However, this strategy only applies at the Seed stage – different strategies apply at earlier or later investment stages.

For instance, at pre-seed, there is no momentum because you can only join one accelerator!

And at Series A to C – there’s much less momentum because its largely driven by spreadsheets!

From the founder’s point of view this means that if you can get one Seed Venture Capitalist on board then the others will follow!

It also means that many Seed VCs are using standardised typeform style applications – so no secret intros required!

Nor do you need to find them on LinkedIn either (albeit, there are exceptions).

Insight number THREE. Understanding momentum investing

Earlier, I mentioned that European Seed fundraising investment largely follows a ‘momentum’ strategy.

So, what is momentum investing and how do founders prepare their startups to appeal to this VC strategy?

Essentially, momentum investors want to see rapidly growing traction before they invest. Traction can be evidence of increased users and / or customers and some ‘customer proof’ is promises to buy or actual first transactions.

However, because many Seed investors are using the same investment strategy, once one VC is interested, then they are all interested!

You may have seen pictures of car pile ups?

Yeah, that’s kinda how it works.

However, there are exceptions. A few VCs are entirely relationship based – they take their time; they often pass on the first rounds but aren’t afraid to join later!

And then finally, mainly in niche sectors or specialist sectors – pharma, deep tech, impact, sustainability etc… there are some VCs who will invest because they ‘believe’ in the project.

Also, some specialist investors will invest without pitch decks. But nevertheless, they will almost certainly require some kind of intellectual property or patent.

Hence, for the vast majority of startup founders – your best bet is to demonstrate momentum through traction.

Yes, theory is good, clever tech is good – but only user / customer traction /momentum will generate term sheets.

I have built a slide that I now advise my fellow founders to use at the front of their investment decks:

Traction: the seed investment slide
What does this slide tell us?

  1. It’s about setting out what you have achieved in terms of traction, and…
  2. About how you see that traction accelerating in the months ahead, and…
  3. Where traction is measured as both quantity and also value – so, a marketplace might speak about the inventory loaded onto its website – and the value of that inventory if it all sold
  4. Client proof. Note, this *might* be early revenue, but equally, it might be offers to buy in the future or other statements of buying intent
  5. Again, you need to forecast how the revenue will grow in the months ahead
  6. List your key technical achievement and your future planned product development

(If you want to learn about how to gain traction fast – focus on Growth Hacking. I’ve written a piece here on 5 Growth Hacking Insights and also a piece on North Stars and Magic Moments too.)

Once you can complete this slide, you are ready to raise. Hence, everything should be focused on getting to the point that this slide contains compelling evidence.

And, once you have your slide ready, then we can move onto:

Insight number FOUR. Use Sector Focus to target the right VCs

VCs use three main criteria to determine their focus

  • geography
  • sector (and/ or business model)
  • stage

Note, other criteria can include: the particular interest of partners, impact investing or a focus on underinvested founders.

However, the majority of seed VCs split along the lines of geography, sector and stage:

1. Geography

Seed geography falls mainly into:
* All Europe (including UK);
* UK only;
* Nordics & Baltics (and some subsets);
* Iberian Peninsula:
* CEE or SEE
* There are a couple of France only or Italy only funds too

2. Seed sectors

Seed Sectors vary from verticals such as gaming to deeptech (science, AI, Data), health, brands, ecommerce, media, edtech etc. Or, they may focus on business models, eg SaaS, platforms, B2B/ Enterprise, consumer etc.

3. Stage

And lastly, you need to be at the seed stage. That is, showing strong traction in a big potential market with early customer proof (see slide above) and raising a sum of money that fits the Seed VC’s budget.

To attract Seed VC – you have to meet their investment criteria – and typically, the typeform application will automatically sort out whether you are in the right space for this investor or not.

In truth, VCs blow hot and cold on some sectors – geography is often flexible as are verticals – and you never know until you ask!

So, you might as well send your deck anyway.

Nevertheless, you can use sector or geography focus as a way to create a short list of close matches. And, it is likely that among this group you will want to find your lead seed investor who will then bring the other VCs and investors with them.

Insight number FIVE. Don’t believe the hype – it’s (nearly) all about traction

Lots (but not all) of seed Venture Capitalists claim they invest in ‘team’ – but how do you demonstrate team?

Answer: demonstrate;

  1. A great product (MVP)…
  2. Focused on a large disrupted market which…
  3. Is gaining (user and / or customer) traction.

In fact, for momentum investors – see above – if you have rapid traction, that is proof that you have a great product AND a great team!

That’s why the slide I shared earlier works – it’s really about putting your traction proof up front – and then connecting user traction with (paying) customer proof.

Some Venture Capitalists are looking for you to demonstrate a ‘unique insight’ – which again, converts into evidence of traction and ideally a strong indication of long term potential growth too.

You may also see VCs talk about ‘unique insight’ by they often mean a ‘Network Effect’ driver or ‘Multipliers’.

I’ve written another article on how this element is largely the same as your North Star or Magic Moment. Do check it out either here or on my YouTube channel.

This ‘magic moment’ insight will be critical to your long term success on whether you raise funds or not.

Insight number SIX. VCs see Seed Fundraising as a cheque size!

When Venture Capitalists talk about Seed, they are thinking about investment cheque size – so, if you look at the cheques they write, you can tell if they are active in seed.

(Remember, Seed raises between €1m and €3m – convert to £ if you are raising in UK or Swedish Krona etc)

From the investor’s perspective: seed is a +/- €1m to €3m investment for a 15% to 25% equity stake.

It is worth noting that VCs in Spain and Portugal or Central Eastern Europe or South Eastern Europe, tend to have smaller funds and invest lower amounts.

However, this is changing quite rapidly in Spain and Portugal as Nordic, German, French and UK based funds, focus on Iberian startups.

Although, I haven’t seen any similar movements in investment size in CEE / SEE funds, yet!

As mentioned above, from the founder’s perspective, Seed is the stage where you have a viable product, you have user growth and are seeing the first paying customers.

The secret here is to make sure your startup is focused on getting to the point of landing your first customer with your initial resources. If not, you may struggle to develop your business sufficiently to persuade Seed investors.

Insight number SEVEN. Plan for Series A – the next step

The goal of the seed investment – from the investor point of view – is to develop the startup and grow revenue to a €1million+ annual recurring revenue…

…which then opens the door to Series A investors (who pay about six times more money for the same size of equity stake).

It is important to recognise this as your startup’s next step and to ensure that you ask for enough money to achieve that goal – with a bit to spare.

Note, in many cases, the investment money will be spent on staff. So, typically a team of between 30 to 50 people built over 6 months and on board for a further 12 months, gives you a quick assessment of how much money you will need.

It’s in the region €2m.

One of the risks then, in taking on Seed investment, is that if you accept the money too early, you may not be ready to build the team to this size in this timeframe…

…and / or if your business has uncertain foundations then the whole edifice could come toppling down.

Hence, don’t accept Seed funding too early.

Insight number EIGHT. Understand the VC cycle to know who to approach

Venture Capitalists are active ‘differently’ during their own fund cycle!

Here’s how it typically works:

  1. VC raises a fund – let say €60m for a 10-year period.
  2. Years 1 to 3 – they invest in lots of seed opportunities
  3. And years 3 to 6 – they invest in follow on Series A, Series B opportunities
  4. Years 7 to 10 – the final years – they are exiting – to return the money to investors, with profits which then enable them to raise more money for the next fund.

So, focus on seed investors who have raised funds in the last 2 or 3 years – not those that once were active.

That is why is is good to know that 13 new funds (on a pro rata basis expect 20 for the year) have raised Seed investment by August 2021.

And that another 40-90 European Seed funds are still within their first three years active investment phase or have active investment strategies. Again, please note: some funds don’t share their fund raising activities – such as corporate funds, but are still active.

Note, if you see that an investor is active in Seed but hasn’t raised a fund for 2 to 3 years – it may be a sign that they are about to launch a new fund!

In which case, it would be a *great* idea to pitch them – even though their old fund is aging.

However, VCs with funds older than 5 years are probably closed for new investments.

Insight number NINE. How to negotiate with Seed investors

Now you understand the different stages and what the VCs expect of a Seed investment you can begin to figure out how to negotiate.

Essentially, a typical Seed investment discussion follows this path:

VC: “Nice to meet you, let’s just take our time and get to know each other.”


Founder: “The train (or investment opportunity) is leaving the platform*, are you getting on or not”?

(* actually, the founder is often screaming – ‘I’m out of money, out of resource, I need funding now’. But don’t let that get in the way of the negotiation).

So, what’s happening here?

If your startup has strong traction and is beginning to land first customers, you can probably see a path to more revenue and towards €50k per month revenue.

If so, this is post-seed (a stage halfway between Seed and Series A).

And, if an investor waits to invest at the Post-Seed stage, they pay twice as much for the same stake.

Equally, if they delay until the Series A stage, instead of Seed, they will pay six times more money.

That’s a huge difference!

Hence, it is in the VC’s interest to delay investing until your startup has more evidence and has grown further and is seeing more revenue.

Effectively, if a Venture Capitalist can pay Seed price for a *post-seed* startup, then they have doubled their money (on paper, at least) right away. Smart move!

So how do you, the Founder, push back?

Answer, say this:

“the train is leaving the station – if the you (the investor) want to get on at Seed, you need to do so now, if not, the next stop is Post-Seed when you’ll pay double for the same stake”.

Founders need to remove the opportunity:

The curious thing here is that the Founder has to take the opportunity off the table as quick as possible…

…and the VC wants to keep it on the table for as long as possible!

Okay, I’m characterising here to make a point! And yes, each VC is different and you can build great relationship with your VC etc… but it is critical to know that this dynamic is playing in the background of every negotiation…

…even if no one says so explicitly.

Just never forget that your job – having offered the initial Seed investment opportunity – is to build your startup to Post-Seed as soon as possible.

The faster you do this, the more VCs will knock on your door.

** So, what’s the coaching question from all this?

It really has to be this:

Is the train ready to leave the station?

In other words, have you built, or are you building, your startup such that Seed is only a temporary stop and that you are preparing to move to post-seed funding very soon?

If you like this, you can check out more of my stuff at Media Modo, subscribe to my Founder’s Insight newsletter or watch the video version:

Nine Insights into Seed Funding in Europe - Neil Lewis, Media Modo

Nine Insights into Seed Funding in Europe – Neil Lewis, Media Modo