• Raising money as a startup is a tricky business and comes with plenty of pitfalls.

• In +More: the busy start to the funding year continues, GuardDog’s first bite.

• Dmitry Belianin talks about his new investment funding and mentoring efforts.

Who needs to go to work to hustle for another dollar.

Too much, too young

Gimme, gimme, gimme: The pitfalls of raising money for a startup or a scale-up business are all too apparent in the failure rates for any type of growth company. A simple Google search will tell you that anywhere upwards of three-quarters of all startups fail. No wonder many view money raises in and of themselves as a sign of success.

• Indeed, sometimes a big headline-grabbing amount raised can be part of the company’s strategy for surviving the grinder of failure. 

• “That can absolutely happen,” says Matt Restivo, CEO at OddsJam. “Just look back to some of the crypto-related raises in 2021. They raised huge amounts.”

Talk the talk: Andy Clerkson, partner at Tekkorp, says that though it is unlikely in these more restrained times that any startup would raise more money than is necessary, “no doubt some founders love raising money and talk about that more than the business.” That, he suggests, is a “worrying” sign if you are an investor.

Read all about it: Against the more realistic fundraising backdrop of 2024, where the outright pessimism of last year has been replaced by a more cautious and more muted optimism, there is still a place for grabbing some limelight by announcing a (perhaps modest) raise. 

• “It can attract media coverage, prospective customers and future investors,” says Lloyd Danzig, an investor with Sharp Alpha.

• But, he adds, while it can signal momentum and validation there are “also drawbacks to unwanted attention.”

• Benjie Cherniak, the principal at Avenue H, says a headline-grabbing fundraise “might speak to an impressive cap table, an oversubscribed round or a significant amount of capital raised.” 

• “All the above may stack the deck in favor of success but does not guarantee as such,” he adds. 

Taking the biscuit: Clerkson agrees that a large raise, particularly if it is based around a concept rather than, say, a founder’s track record, is “not a marker of inevitable success.” “In fact, the opposite,” he argues. “The money may have come in for a reason apart from the greatness of the pitch deck and total belief in the business.”

• “Big money startups look scary when the founder only talks about shareholders and finance, they have a super swanky office, someone who brings the coffee into the meetings and multiple types of posh biscuits.”

• “But once you see the first big money raise and then the posh biscuits, do some serious DD before you go into the Series A.”

The need for speed: Rather than the size of the raise being a factor in persuading more investors to get on board, however, it can sometimes be the speed at which a deal is completed that can act as a spur, Clerkson adds.

• The speed that an allocation is filled creates the greatest FOMO in other investors, and that creates its own buzz,” he says. 

• He cites the example of BetDEX, which raised $21m seed in late 2021 off the back, he says, of a seven-page slide deck and two of those were the intro and the contact us slides. 

• “The remarkable thing was momentum and it all seemed to happen in a week.”

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The art of raising cash

What are you having? Gauging the amount that a company has to raise is more art than science, suggest the experts, though clearly to obtain capital investment plans will need to have moved beyond the back-of-a-napkin stage.

Etch-a-sketch: Restivo points out that every founder should be smart enough to know “there’s some kind of model” that applies to their business but such plans might be somewhat sketchy through early-stage, pre-seed and seed levels of investment and even through to Series A. “I mean Series A is when we really first start to build a model,” he says.

• But as Danzig suggests, at the stage of talking to venture capital, a detailed financial plan will be necessary that “reflects deep thoughtfulness about operations and growth. 

• “While flexibility and negotiation are always a component of the fundraising process, a completely unstructured approach is unlikely to be well received by institutional investors,” he adds.

Opportunity knocks: The ‘how’ of raising money is perhaps different from the ‘why’. Raising cash “opportunistically,” as Danzig suggests, is sometimes a recommended route – the equivalent of putting money aside for a rainy day, perhaps – but he adds that others will advise on “raising only what’s necessary to reach key milestones.”

Watered down: A key element will be how a cash raise affects the cap table. As Cherniak suggests, an “astute founder” will be looking to raise only the capital needed to achieve “well-thought-out goals” while minimizing dilution.  

• “Raising the right amount at the right valuation so as to maximize value for all stakeholders involved is the validation that a founder should be looking for,” he says.

• But he also sees the advantage in raising that rainy day fund. “A founder could be, and probably should be, tempted to take a bit extra if the opportunity presents itself, even if it means additional dilution,” he adds.

• “Building a war chest of funds for future use can be strategically opportune in the right situation.”

The right path

Jam tomorrow: That said, the current backdrop – and certainly the paucity of deals seen in 2023 – suggests not many companies on the fundraising path right now are trying to get in more than they need. “In this market, there's not a lot of people out there raising more money than they can,” says Restivo. “Valuations have come down and they are a little more realistic.”

Putting the time in: Restivo points out that fundraising is a “really time-consuming process” and Clerkson agrees that “it’s valid to not want the distraction” of multiple fundraising events. “But If you’re on the right path, the equity you give up now is the most costly to you,” he adds.

• “Don’t dilute unnecessarily. Keep honest, sell the hype but don’t believe it and take the rewards later.”

• Meanwhile, if building a deck is the issue, then there are – of course – companies that can help such as Slidebean.

• As for the details of the plan, Clerkson says investors are looking at operating metrics “if you've got them.” But assuming there aren’t any, then it’s just team track record, vision and “if it smells right.” 

• “You know that the business will have to adapt,” he says. “Usually decks have reliable detail around hard costs like ‘$x on new staff, $x on product, even $x on admin expenses, then a much higher number for marketing and promotion.”

• “That is completely finger in the air.”

Danger signs

Power relationships: It’s an obvious point that those raising money are the ones going to the investors and rarely is it the other way around. It means the power in the discussions is all but guaranteed to be unequally distributed. 

Stand firm: But Clerkson says if a company is “just raising money” and not bringing in people to help the company succeed, then his advice is to “hold firm” over the likely demands.

• “Don’t give away too much to the wrong people,” he says.

• Investors will chip at you, he adds, asking for such extras as options to buy in later at today’s price and additional warrants.

Do you remember the first time? Danzig says the pitfalls for those raising cash for the first time, in particular, include setting unrealistic expectations, approaching the wrong investors, being underprepared, over-embellishing progress and forcing a one-size-fits all pitch.

• Those coming at it from a bootstrapped environment will find a slew of obligations and responsibilities that come with the big check.

• There may be specific reporting requirements, as an example,” says Cherniak.  

Much obliged: Moreover, he adds, the moment a founder takes VC capital they then have an obligation to “serve the best interests of those investors, to communicate with them, accept some guidance from them and generally have those key investors alongside your journey as a valued partner in business.”  

• “There are not necessarily negatives at all and on the contrary should be viewed as positives but still something a founder should be aware of when taking outside capital.”

The home front

Disruption, but not in a good way: None of this happens in a vacuum. At the stage of raising cash, startup companies will likely be well on the way to being complex organizations with staff members and management teams that will likely be well aware of whatever fundraising processes are under way.

• But while fundraising “can be debilitating” for the founder and CFO/COO, says Clerkson, it shouldn’t affect anyone else and “if it does, the senior leadership team isn’t approaching it right.” 

• Moreover, if the leadership team doesn’t have a financial background then that is what advisors are for.

Tell all: “It is a founder’s responsibility to ensure raising capital is not a disruption to the staff at large,” says Cherniak. “If handled properly, there is no reason for a fundraise to create a lack of focus within the organization.”

• Restivo agrees, pointing out that founders are often not transparent because of the potential for distraction.

• “I think you don’t want your employee worried about their next paycheck,” he says.

• “That’s ultimately the burden of the founder and the entrepreneur. You want your team focused on executing.”

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+More startups

February funding: While not hitting the heights of January’s $34.5m raised from eight deals – with six deals happening in one week – last month continued to see activity, with five deals completed – four new funding and one sale.

• That was BeyondPlay, the iCasino innovator, which FanDuel bought for an undisclosed sum.

Regtechies: Notable among the rounds were the investments received by two regtech providers on either side of the Atlantic. US-based AML provider Kinectify saw it onboarding Aristocrat as an investor in the business, while ClearStake also saw a number of executives from the space stump up a seven-figure sum. 

Dog watch: This was followed by news just yesterday of Underdog Fantasy’s GuardDog initiative making its debut investment in the single-customer-view tech solutions provider idPair.

• Recall, UF launched GuardDog in November last year with the intention of funding startups working in the responsible gambling space. It set aside $1m of initial funding.

• CEO Jeremy Levine told E+M at the time that as his company looked at RG issues “what everyone was doing was table stakes,” adding that UF wanted to “do more and to do it better.”

• “When we started Underdog Fantasy, everybody said we were crazy trying to take on DraftKings and FanDuel. But I knew there was the opportunity to build a better fantasy business – and now the same thing applies.”

Investor focus – Belianin.com

Me, myself and I: Dmitry Belianin, formerly with Parimatch, has set himself up as an investor and startup mentor with a specific focus on the gaming affiliate space. “In the world of affiliate marketing, there’s a ton of room for growth and improvement,” he says. 

• Belianin sates his main aim is to help companies working in the space “get better at what they do, helping them grow and reach more customers, both B2B and B2C.”

• “There’s always something new happening in affiliate marketing, so there's a lot of chances for companies to try out new ideas and really make a name for themselves.”

Let me tell you how it will be: Mentoring, Belianin says, is central to his investment proposition. Having banked years of experience working in the space, he feels he has “learned a lot of lessons” and he wishes to share the fruits of this with others.

• “By working closely with founders and sharing what I've learned, we can avoid making the same mistakes and really speed up the process of building a successful business.”

Shake some action: That also means being willing, as Belianin says, to “shake things up,” adding that people within the industry tend to stick with what they know.” But he says he is “always on the lookout” for new ideas and believes that he is well-placed to bring innovation to affiliate marketing.

Off the mark: Belianin has already made investments in five companies in the affiliate and marketing areas, putting in ~$500k per opportunity. “It’s a pretty good amount to work with, and it gives us the flexibility to really support the companies we believe in,” he says.

• “Right now, it’s just me,” he adds. “I’m really hands-on with the companies I work with and I think that’s a big part of what makes this venture successful.”

• “But I’m definitely looking to expand my team soon so we can take on more projects and really make a difference in the industry.”

The month in focuses

• Feb 26: Odds impact quantifier HoldCrunch.

• Feb 19: Decentralized betting exchange LiveDuel.

• Feb 12: ICE fast forward competitors.

• Feb 5: Odds comparison provider OddsJam.

Calendar

• Mar 5: Full House, AGS

• Mar 6: Genius Sports, Super Group, Rush Street

• Mar 7: Entain, IGT

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