Taking IoT startups to the next level
Breed Reply have recently launched an open call for IoT startups looking for Series A funding. In this post, Emanuele Angelidis, Chief Executive at Breed Reply talks about what’s expected from those looking for Series A funding.
A stat for Internet of Things startups to consider: Series A investments in European technology companies represented just 16% of the total global amount compared to 70% in US start-ups last year, according to PitchBook.
Why is this important? Businesses that are successful in getting Series A investment, a company’s first significant round of venture capital financing, is a determiner of whether it will be a long-term success. For those involved in IoT startups, the more companies that achieve this funding stage and beyond, means more money coming into the industry as venture capitalists see the returns on offer.
The issue facing entrepreneurs is the step-up from attracting angel investors to achieving substantial Series A funding is significant. It can mean a significant change to how the company operates, its culture and its approach. Finding start-up funding is arguably relatively easy. Amounts are small, and there are lots of incentives for people and organisations to provide capital. However, companies that then go on and draw Series A funding from sophisticated private investors are rarer, only 20-30%.
European startups are too often not ticking the boxes that investors need. Part of the problem is culture. Investors in Europe are more risk-averse and demand more guarantees than US investors. In the US, funds are more numerous, and an entrepreneurial spirit overwhelms fears of business failure. In the more cautious continent of Europe the escalation from being a start-up to Series A is a much bigger one.
The Series A process typically takes between six to nine months, and potential investors will go through an in-depth due diligence and negotiation process. We helped six IoT start-ups raise in total more than $50m in Series A funding in 2017, and there are five things that a company needs. To realise them means IoT founders need to take a long hard look at themselves to eliminate their weaknesses and attract investors.
First, they must have a long-term sustainable competitive advantage where the company has a distinct proposition that can survive the emergence of rival technologies.
Second, scalability, which means a technology that can be replicated and sold across multiple markets and territories. Be warned, something that is too complicated to mass manufacture or to adapt to different market demands will restrict growth and investment interest.
Third, start-ups must show a proven commercial model. The business needs to be able to demonstrate that it has a product that customers want to buy and they can sell it. It must have revenue generating customers who have actively acquired the product and not just been using it on trial.
Fourth, and this may seem obvious, a technology that works. Series A investors need a proven technology working in a commercial setting, not just a good idea or something that has only worked in a test environment.
Finally, and probably most importantly, proper corporate governance. A company must be professional. Professional means critical roles such as CFO, COO and Commercial Director filled by high-quality, experienced individuals. Investors want proper board processes and financial controls if they are to invest in the enterprise.
Firms with ambitions for Series A funding should not fool themselves that they can skip on any of these elements. Series A investors typically have a rigid process they follow, and ‘woe betide’ anyone who breaks their rules.
More focus on having these crucial things in place will put any business in a strong position to have a successful Series A funding round and can help level the playing field between European companies and their US equivalents.
Emanuele Angelidis is chief executive of Breed Reply, Europe’s leading internet of things investment house. It recently launched a new Europe-wide search for IoT investment opportunities, ‘Best in Breed 7’. Please visit www.breedreply.com
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