Guide: Startup Funding in Europe

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Startup Funding in Europe has never been easy. Capital is less available than in the US and the Single Market does not truly exist when it comes to software. Furthermore, COVID lockdowns have been more frequent and stricter in Europe than in any other region of the world. For all these reasons, you might thought that 2020 would be annus horribilus for startup funding in Europe. 

But, you’d be wrong. To help customers who are currently raising Venture Capital (Seed and Series A), We’ve been researching the state of the VC market post COVID. If your startup is ambitious, healthy and growing, the chances of raising Venture Capital are quite good. You need to understand what VCs expect and deploy a clear strategy accordingly. If you have the right strategy and approach, your startup will be rewarded.

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Top Startups are Raising High Amounts, The Rest Get Nothing.

 Elite Companies Are Raising historically high Seed Rounds.

Seed Rounds Valuations have doubled in 10 years: In 2010, companies raised $1.3 million before Series A on average, compared to $5.6M in 2019. Importantly, there’s no evidence of a crash of Seed Round valuation, even if the number of rounds decreased during COVID:

  • In the Bay Area, we counted 175 Seed Rounds on Crunchbase as of this writing  (published on October 30th, 2020). The Median Seed Round was $3M.
  • In Europe, 144 Seed Funding rounds were identified by Crunchbase in the past 90 days at a valuation of 1.5m€ on average.

Startup funding in Europe also remains healthy for Series A. In the past 90 days (published on October 30th, 2020), Crunchbase identifies 79 Series A rounds at a 12m€ average.

No Free Lunch, Quality Matters

VCs are Investing more Seed into Fewer Companies. The amount of Angel and Seed deals decreased 44% QoQ (from 3,240 in Q1 to 1,791 in Q2) globally. This drop would seem to mean that investments are crashing. However, the amount invested decreased by only 18% QoQ (from $2.8B to $2.3B). Q2 2020 has seen a lot more money for the highest potential.

raising series A post covid

Getting to Series A Funding is much harder for companies: you actually need customers. 

Q2 2020 Seed rounds are interesting because they are often invested in companies that were not previously in a VC’s portfolio. During COVID, the conventional wisdom was told that VCs were only protecting companies already in their portfolio. It would seem that this is not the case. Q2 2019 saw average Seed & Angel round size of $1.3M, same as Q2 2020 when the world was locked down

Sales Momentum is a must to get VC Investment

In the past decade, getting to Series A has become harder: startups need sales momentum. In 2010, 15 percent of companies raising Series A had revenue. In 2018, 85 percent had revenue. Based on a survey of our network, we’ve yet to find a company that is looking for Series A without ARR.

Sales momentum is critical for Startup Funding in Europe. It starts much earlier in the process, which acts as a filter between concepts and real products. Momentum also allows investors to quickly assess how fast a company can generate cash if the crisis deepens.

To conclude, times are great for best of breed startups and awful for everyone else. Startup funding in Europe requires understanding how VCs identify elite companies. If you are part of the elite, funding will be achievable at good conditions. Else, you need to find another business model or completely change your go-to-market approach to become elite. 

Startup Funding in Europe means aiming T2D3

What’s T2D3 and why should you care? Every Unicorn starts at $0 revenue. The difference between a former “Next Google” and an actual growth rocket is the years to get from $1M to $100M ARR. According to Bessemer Venture Partners

  • Good companies take four years to get to $10M ARR and ten years to get to $100M ARR,
  • The Best get to $10M ARR in two years and $100M ARR in just five.


This hypergrowth potential is what VCs are looking for and what startups need to demonstrate. Potential backed up by metrics creates a positive cycle of venture capital and results that snowballs over a decade.

How do you reach these levels of ARR in so little time? The objective for startups today is T2D3 – Triple revenue 2 years in a row, Double revenue 3 years in a row. Simple, right?

Use Metrics to Prove Potential – Not just ambition

Basketball scouts had noticed LeBron James when he was in middle school as NBA potential. Did this attention mean that LeBron James would end up with the career he had? No. But there were clear indications that betting on James’ potential had much better odds of success than other good middle school players.

Startup Funding in Europe is similar to athlete scouting. While raising a successful Series A, with the right amount of capital, valuation and the right VCs, doesn’t mean the company will become Unicorn, it is an indication that the odds are in the startups favor.

However, while LeBron James had standardized Basketball statistics to prove he was above the rest; how do startups prove that they have the potential?

Some metrics separate the good from the best. These are the metrics you need to obsess about.

Prove your Potential with LVR, ARR and NDR.

All things considered, B2B software is a simple industry.  Vendors get prospects to buy into their vision, they transform prospects into customers, and they grow how much money they make per customer through upselling and cross-selling. These billion-dollar company objectives must also be the objectives of a million-dollar company trying to prove billion dollar potential. Successful startup funding in Europe means explaining in simple terms to the VC how you are delivering these three metrics: 

Metric 1: Lead Velocity Rate – or How fast can you put Leads in your funnel

LVR = (Qualified Leads this month – Qualified Leads last month)
/Qualified Leads last month.

Qualified Lead Velocity Rate is a way of tracking, not only how many leads get in your funnel, but how fast the number of leads is growing.

In B2B sales, sales cycles can sometimes take months. Let’s say that 5% of your leads become customers on average. By tracking Leads, you can estimate your ARR months ahead.  By tracking the speed at which the amount on monthly Qualified Leads is growing, you can prove that you are on track to reach $10M in a few years. Lead Velocity Rate puts you in Elite category, making your startup funding in Europe better, faster, stronger.

What to do if LVR is high that ARR growth rate?

  1. LVR was never a good predictor of sales: your marketing is not sending qualified leads, just volume.
  2. Your sales team has recently changed, then you need to solve sales hiring or onboarding
  3. Same sales team and marketing team? Then your product is the problem. Meet with as many prospects as possible and understand what feature your competitors recently added and why it’s important. (Note: Sometimes, “missing” features are a UX problem. The key feature is in the product but not easily found nor well marketed.)

LVR is a great indicator that gives you a real time pulse on your company’s performance before quarterly results start getting missed and the impact is deep.better, 

Metric 2: Monthly Recurring Revenue or Annual Recurring Revenue

Annual Recurring Revenue (ARR) is what gives SaaS its incredible value. Contrary to conventional software sales that has to be fought over for every transaction, SaaS companies have a model which is much more valuable both for the vendor and the customer: long term relationship. The customer pays every year and sees the software evolve with his needs over time.

The trend today seems to be telling startups to reach $1M ARR minimum before Series A, $2M being better. When setting milestones, it’s critical to remember that the value of SaaS comes not from the size of the contract but from its recurring aspect. The stickier and more recurring, the better! In other words, $1M ARR on a very sticky product with an enterprise account is worth more than $2M ARR selling a gadget which, while cool, can be replaced overnight. 

How much ARR does Series A Startup Funding in Europe require?
In an Established market, get to $2M ARR

This number proves that you have something competitors don’t, and you’re existing revenue doesn’t just come from your personal network. $2M may sound arbitrary, and it is. But if everyone is aiming $2M and you meet with a VC and show him $1M ARR, you will not be in front of the line. Differentiation matters when competing for capital.

When you are selling a disruptive technology, ARR doesn’t matter as much

Translating the value of disruption in ARR is tough in the short term, as pricing models may change regularly until the right model is found. However, if a few, but replicable, customers buy your product, even at a low price, but use it every day, then you have solved your company’s biggest risk factor for VCs: you can prove there is a real need. It’s very easy to use these references and grow your pricing significantly. For sake of (clarity, I’ll recommend (somewhat arbitrarily) that you reach $1M ARR AND have data proving that customers are using your product more and more months after initial purchase.

Enterprise SaaS need to deliver a few Strategic Accounts

Enterprise Sales is very difficult for startups, as sales cycles are long and changing the status quo is tough for these giant companies. However, selling to the Enterprise is also extremely profitable: once a customer picks your software, you are there for years. Large accounts have, by definition, the highest customer LTV (Lifetime Value). They sign big deals and change slowly. So how do you raise a Series A with enterprise sales? I would recommend showing 3 Enterprise customers who have gone from POC to production, with production deals around $100k. If you complete this metrics with other POCs being negotiated, a growing pipe and a roadmap to take $100k for your first three customers and push it to $1M per customer in a few years’ time, you will be a very credible candidate for Series A.

Metric 3: Net Dollar Retention

Net Dollar Retention’s objective is to track what each dollar of SaaS revenue today will become in the future.

Net Dollar Retention = (Beginning Period Revenue
+ Upgrades – Downgrades)/
Beginning Period Revenue

For example, Startup A has high churn and only one product with no upgrades, an NDR of 90% tells investors that if Startup A generates $100 ARR this year, the same batch of customers will generate $90 ARR next year. In other word, the company is a leaky bucket. As time goes, and new customers will be harder to find, the company will be bleeding money.

Startups raising capital today have 110% NDR in average. The very best have +120%. NDR over 100% (also called net negative churn) means that not only do SaaS startups raising capital see low levels of churn, they are also able to grow inside their accounts by selling the same product to more internal users or add features (often both). When they sign a deal with a customer, not only does the customer not leave, the customer becomes a growth engine.

So, what to do about NDR as a Startup? Firstly, track it. Knowing how much you are selling isn’t good enough if you don’t identify holes you may have in your bucket.

What to do if your NDR is less than 100%?
  • Collect data on each and every churn and understand why it happened. Remember that churn is a lagging indicator. Look for the indicators that precede a churn. Often, companies may buy your product as they like the concept but stop using it after a few weeks. Was it because the onboarding was poor? The UX is too complicated? Or have they found a solution that worked better? Find out why and fix it.
  • Target your customers more precisely: while the NDR is an average calculated on your whole customer base, look for clusters. Maybe a type of customer needs your product more than others. That’s OK, just make sure your company focuses marketing and sales resources on the customer profile that works.
  • Bigger customers churn less. One way to grow NDR is to grow the size of your customers. Indeed, a billion-dollar company may take longer to purchase software than a small two-person company, but they give startups more room to grow the account and change product a lot less often. This fact explains why companies from Salesforce to HubSpot may have started with small companies but focus on Enterprise today.
Progress and Momentum are the key

Finally, for the startup entrepreneurs with low NDRs, don’t despair. With an awful NDR, but solutions being tested and results moving in the right direction, you can still raise capital. All you have to show is be transparent and show momentum. For example, Assemble your customer base in batches depending on when they became customer and analysing NDR per batch. If you can prove that newer customers have an NDR of 110%, I’ve yet to see an investor who complained that you had a high churn rate a few years ago when you were still looking for your market.

Plan for Series A and a Flywheel Effect

If we keep projecting back from the current batch of SaaS IPOs, Unicorns deliver tremendous growth and proved their Unicorn potential before raising Series A. This potential can be tracked with Lead Velocity Rate, ARR and NDR. But what does it take to raise a $2M Seed round?

Seed rounds, by definition, are very early in a startup’s life. This means that many companies will be selling a half-baked product and receive a lot of questions about their business model that they may not be able to definitely answer. You will find on the Internet a lot of posts describing how to raise Seed funding, how to network, how important it is to have a great founding team. I’ll focus on three points:

Build a Business Plan to go from now to Series A

Always raise Seed thinking about Series A. We saw above what it takes to be identified as an Elite B2B SaaS startup. How much capital and resources do you need to reach these metrics 18 months after the Seed round? Asking yourself this question will allow you to clearly explain to VCs why you need the capital and what you will do with it.

Deliver Initial Traction in the Three Key Metrics to Prove Potential

What initial traction do you have that prove a growing LVR, ARR and NDR? Are the metrics moving in the right direction, show it! If they aren’t work on them before you get a valuable pitch meeting and burn a VC.

Think about your Moat

Finally, the more your B2B SaaS company grows, the more visible you will become. Competitors, both big and small, will come after your business. Using data from today to project LVR, ARR and NDR growth in the next decade is only valuable if no one can push you off your trajectory. What is the secret sauce that proves that no one can catch you up? How do you build your monopoly?

Startup funding in europe

Helping with startup funding in Europe post-COVID has led me to study and discuss the state of Venture Capital with as many people as possible to better understand what it takes. I hope this summary of my learnings will be useful in your venture as you build a deck and start pitch.