Michał Blak, edrone CEO is sharing his experience on fundraising.
In late August 2019, I had an offsite meeting with the Steering Committee in which I shared the ambitious plan to raise our first pre-A round investment of about USD 2.5M, and also another similar size R&D funding. At the time, I estimated that the fundraising would take 12 months and the R&D grant would happen by the end of 2020. Today, I would like to tell you the story — in more detail — of how we’ve managed to raise the two-source capital and what was the daily basis CEO job behind it.
I believe sharing this kind of information contributes to our MarTech community as well to businesses in general. So, in this article, you will have a clear understanding of what was my ordinary activities and the stages we went through as a company; this might help you in making decisions whether to fundraise or not and how to do it effectively.
We’re edrone, a technology company that helps eCommerce businesses to increase their revenue through customer experience management and marketing automation. We recently secured a Series A investment of USD 2.5M, coming from PortfoLion (a VC company); this happened right after another funding: a USD 3.3M R&D grant from the National Center for Research and Development. It’s our first funding after bootstrapping for the last 4 years.
The Bootstrapping Dilemma
When asked by clients, colleagues, and investors about our fundraising plans, I couldn’t hide my skepticism when giving my answer. Everyone who ever heard me talking about my vision for the company knows well that I have always been keen on the bootstrapping-first growth strategy, before any external aid — of any kind.
It is known that the EU, especially in the CEE region, is not the best place to get significant seed money and a quick investment journey. Obviously, you can, but you’ll probably keep a smaller share of your own business before raising serious money.
Therefore, it seems a much better direction to bootstrap your company and deliver the traction as long as possible if it can be effective and efficient. But when is the right moment for your company to start fundraising? Well, I can not answer this on your behalf but I can share the three milestones I have set in order for us to achieve prior to funding.
edrone’s Milestones Prior to the Investment
- Building a product that would allow us to reach our ideal customer;
- Getting a more than USD 10M valuation; and
- Being able to show solid cross-boarding strategy results, with ambitious but realistic numbers and delivered benchmarks.
We started our fundraising after A, B, and C “to-dos” were marked as done. Then, it came the time to be challenged by investors; and I had to defend our assumptions. Let me give you a few details on how I did this.
Milestone A — Should the Continuous Pivoting Determine Your DNA?
You have heard that iterating and pivoting should be an element of the founder’s DNA. You’re working on something outstanding and new, so you’ll have to pave the way as startups are growing in an uncertain environment. But would you say that to your potential investor? Probably you could if you had been successful in past fundings. However, if it’s your first fundraising, I wouldn’t recommend following this path. Staying innovative is not equal to staying shaky. You have to be clear and certain about your idea and your competitive advantages. Some initial talk with first investors would help you to make your elevator speech better. So do not regret burning the first few of your meetings.
Milestone B — How Do You Value Yourself and the Company?
If your company has no investment record, probably the easiest way would be to find benchmarks from your industry and region. Easy as pie, as small rounds and valuations are disclosed quite often. Keep in mind the investor would value your steering committee, founders’ commitment, cap-table, and IP; so not only your metrics. (About the market, segments, and USPs I will say a few words later on). Frankly speaking, we had nice traction, healthy business with 100% founders’ cap-table, but at the same time, I had a lot to learn about SaaS metrics. It was another benefit from the fundraising as a process to learn in detail how the metrics like cohorts, COGS, Margin, and various churn calculations methods work, as well as how to extract batch files from your existing accounting tools. Without an investor asking for that, I would not have done this job with the quality we achieved.
Milestone C — What Are the Drivers to the Valuation?
Of course, you know that as a successful CEO but you now have to defend your thesis… and that’s your number one challenge. For example, when entering the Brazilian market, we decided to do it in an unusual way, where the revenue is not landing into the HQ accounts and it’s not recognized as revenue into our Polish equity. The reason is that the EU does not have a trade agreement with Brazil. As a result, transfers made by Brazilian companies are generating some fiscal risks to these companies. To help them out, we have decided to receive Brazilian revenue from our partner’s Brazilian equity. My job was to convince our investors to recognize it as the company Revenue. This really helped us to strengthen our valuation. This decision helped us also to be more competitive in Brazil, as some competitors are not giving this opportunity to their customers.
Let Your Team Support You While You Fundraise
During last 12 months I’ve made switch from being hands-on, close to most of the decisions CEO to one that is further from day-to-day operations and looks into
Do you know when you drive fast your eye of sight moves further so you can anticipate events that will affect your nearest future? Probably not.
One of the biggest challenges was moving from hands-on, close to most of the decisions CEO to one that focuses on strategic development.
I’m a talker. And I also like to be close to most of the decisions made in the company. I made some personal development and killed the micromanager within myself. Another benefit from the fundraising process. It was also an opportunity for the team to leverage crossbars. You can always help managers within the company on their personal development, but if there is a significant event to secure USD 6M on a due date, it can really inspire them.
The Process of Fundraising
I love processes. I love tables and detailed plans. I love frameworks. I do love it more than being a creative or free-style manager. So what did I do initially? First of all, a spreadsheet, a few quick-talk templates, and a simple sales funnel in a CRM we use for acquiring clients on a daily basis.
Prior to that, I had a few unstructured meetings with VCs and PEs to learn more about their key figures and to make a better feeling of what kind of questions they’d probably ask or would like to hear. I had neither a network within the VC industry nor any track record and I knew that the process would be a long journey. It would be a marathon but, similar to the selling process, some stages should be shortened.
Therefore, in November and December of 2019, the largest three startup events in Europe took place: the Web Summit in Lisbon, Slush in Helsinki, and TechCrunch Disrupt in Berlin. Each was a two-day event of half-an-hour-long slots for speed dating. So I had a chance to conduct several dozens meetings.
Each event had an app, however, it wasn’t enough to make a volume list. So, we simply made a list of all VCs active in Europe using CrunchBase, and three of us made quick talks on LinkedIn asking VC reps to meet at the closest of the mentioned events. We did it a few weeks in advance of the meeting.
If I couldn’t catch someone at the Web Summit, I could pick one again for having casual talks on LinkedIn or asking for a slot on Slush. That worked out and my calendar was booked for 15-20 meetings a day. I had the support of my colleague to manage my meeting app while talking to investors. The pitch deck has changed every evening, and I had a speedy school of fundraising over these events.
That was a job environment put in the order, and quickly I could forget about being out of my comfort zone. I liked it as the three events took place within a month-long period. Perfect for being fully heated and energized.
The next following months were dedicated to the works through the CRM and some Google Meets. Shortly, we had over 70 open deals in the CRM. My skin has become thicker once I heard ‘no’ several times in a row. Finally, I got several propositions and could continue detailed talks about the term sheets received.
After a couple of months, our team proved over and over again that we can make the impossible happen; bootstrapping for the last four years was not an easy feat, especially in such disturbing times. Therefore, I’m really glad that we can now announce these two big investments that will further fuel our growth.
This is an exciting moment for us and we are more than happy to welcome PortfoLion as part of our family. One of the key points was to find a partner that could understand our business; they’ve checked all the boxes.
In the Meantime… COVID-19
I had several propositions on the table. However, it wasn’t obvious to close any deal as I gave me time for these term sheets to be received in April, when the COVID pandemic spread in Europe, making most of the VCs to freeze any investment in order to help their current portfolio companies to go through this challenging pandemic reality. Our business appeared quite pandemic-resistant, which helped us, but some of the investors decided to postpone our talks until further notice.
How to Choose the Optimal List of Prospects (Investors)?
First of all, the easiest way is to shorten the list by a typical ticket size for the funding firms and the industry or geography they usually invest in. It’s very rare to get an investor who would change his strategy because of you. These are usually very busy guys that work on volume databases of potential targets.
I could give you tons of things I’ve learned but maybe there are a few that might not be obvious for you and were quite unexpected for me. Most of Germany-based VC’s were expecting to have 70% of the clients in the DACH region or in the US. Our track record is based on the CEE and LATAM regions so that was a tricky point for us. Most London-based ones were offering PE size tickets.
Also, it is good to ask key things to the investors at the initial talks, besides their typical ticket size: what are their no-gos, whether they invest in the company only or also allows secondaries (exit), what is their typical time to milestones — next steps, decision, term sheet, etc.. An important question you’d have to give the right answer is your time table — “How much time are you giving you to get a TS?” You should definitely give a good answer so that if you’d get back into a discussion they can double-check your success record. If you’d still not have it done you might lose your credibility.
You Are the One Who Has the Final Say
You’ll pitch to clever people but keep in mind that you’re the one who knows your business the best. These guys have a chance to try to understand your business during the 30-minute meeting. So you shouldn’t rely on their findings even if they have built great companies themselves or are close to successful entrepreneurs on a daily basis.
As Ben Horowitz once said: “The assumption is that the CEO will always stay lonely and no one will take decisions for him.”
During the Web Summit 2019 in Lisbon, I met some great investor reps who told me that the going-global (global-first) strategy is the best solution for a SaaS company. Half an hour later, I had the next meeting with another representative from a large VC who said: “Look, Michal, you should entrench yourself in a leadership position in your country and use your baggage of experience to do the same on other markets — one after the other.”
I’m pointing fingers here. These guys have to find their ways to engage with twenty startups a day during a conference. So hear what they have to say but be aware to take advice as an oracle.
I could split my fundraising into two episodes: Pre- and Post-term sheet. In the first phase, I have learned how to speak with investors and how to manage the process effectively. Whereas in the second one, I had the chance to meet dozens of inspirational people and speed leverage some entrepreneurial skills I would never be able outside of these processes.
Even if I would not close the deal I would not regret the time I spent on fundraising. So If you’re having doubts about entering the process I would definitely recommend trying. You’ll benefit from your personal and the company’s development; also, key people of your team would also find themselves in a new role and challenges that would allow them to learn fast about new growth strategies, better understanding of key metrics, so some unexpected doors would open for you.
Now, the Mic Goes to Our Teammates
“Up until today, we were always trying to be down-to-earth when it came to releasing new features. We’ve tried to do it as often as possible, and always do things that are most relevant today, hand to hand with our customers. Building a virtual sales assistant requires a different skillset and another way of organizing our second engineering team. What’s most exciting for me is the fact that there will be over 20 engineers working full time on developing AI, NLU & NLP technology, and another 20 concentrated on the Core Product.” (Piotr Stachowicz — CTO of edrone)
“edrone has proved to deliver a steadily 2-3x yearly growth since day one of its operations on a very competitive market. We believe that their energy and bravery, mixed with our network, business expertise, and financial aid, will only accelerate these numbers and help the company to become a MarTech leader coming from the CEE region.” (Tibor Győrbíró — Partner at PortfoLion.
“South America is the place to be for eCommerce companies. In Brazil alone, this year, we’ve seen 130% growth in eCommerce revenue. Latin America as a whole has grown by over 200%. I’m glad that after a successful launch three years ago, we are still seeing double-digit growth of our business.” (Felippe Pereira — COO of edrone for Brazil)
How These Capital Will Be Allocated
The investment will be allocated into two strategic areas. The part from the pre-series A — coming from PortfoLion — is going to be used to fuel further development in the EU and LATAM regions. In Europe, we plan to open new markets in the CEE region. For South America, the plan is to develop strategic partnerships, since the region has been a place where we have successfully launched operations in the last three years, with over 100 customers on-board in Brazil as of today. We’ll hire more than 100 people in the next 12 months, most of them will be working on the product and business development.The money coming from the National Center for Research and Development (NCBR — Narodowe Centrum Badań I Rozwoju) will be spent on developing artificial intelligence technology for eCommerce businesses. Thanks to the natural language processing algorithms (gMAP and MAP, developed under the R&D work), our team will create edrone AVA — a platform that will allow online stores to assemble and implement virtual sales assistants. Such assistants will be able to freely talk to the customer in the same way as a consultant. It’s more than just a simple bot based on a predictable and finite set of questions and answers. According to Business Insider, in 2022, up to 90% of customer care tickets will be served by AI. We want all of these interactions to be humanlike, therefore, simply pleasant for customers. I’m saying a bit more about AVA in this post.
edrone & PortfoLion
edrone, co-founded by Michał Blak and Rahim Blak, is based in Kraków, and having their offices in Barcelona and São Paulo, and has been on the market since 2016. For the last four years, they have managed to bootstrap their way to over 1000 customers, coming mainly from the CEE and LATAM markets. Currently, they employ over 50 people — a number that will be tripled in the next few months. The company has been named the best CRM for eCommerce, according to the “CIO 100” list of IT Managers, and awarded in the “Best in Cloud” annual contest, hosted by the Computerworld Magazine. Last but not least, in 2019, the Polish company received the “Well-Architected Framework” recognition from Amazon. Their customer base includes Husqvarna, Converse, Leftheit, Tous, Jean Louis David, and other well-known European and Brazilian brands. edrone makes money through product licenses in the SaaS model, with prices starting at USD 300. Their main competitors are Insider, Exponea, Klaviyo, and Emarsys.
PortfoLion is a Budapest-based venture capital and private equity firm which is part of the OTP Group, one of the largest banking groups in the CEE region. PortfoLion provides companies with a stable financial background to facilitate their successful market entry and international expansion. PortfoLion currently manages five funds with a total asset value of EUR 130 million with more than 20 companies in its portfolio. The fund management company partners up with companies across multiple stages primarily in the CEE and SEE regions but it’s also open for investment opportunities from the whole of Europe.