How a Berlin FinTech startup closed a $1.6 million seed round
Shortly after our first press release, emails began flooding in. Amid congratulations from friends, acquaintances, and former colleagues, one particular question kept cropping up. Founders and would-be founders wanted to talk more about the financing round. Because I’ve put off replying to a lot of people till today, and because financing can be fundamental to the success of a startup, I decided to put together this text. As corny as it sounds, I’ve received a lot of good advice and would now like to give something back.
Ehssan Dariani — the first step
StudiVZ founder and serial investor Ehssan Dariani was the first investor in Cookies. We knew each other before in a non-business setting. If, like me, you are interested in FinTech and you have an idea you want to develop, you simply have to let a friend like Ehssan know about it. Not as you would in a pitch, rather in a conversation over coffee with friends. Ehssan understood very quickly what Cookies was all about and said immediately that he could imagine investing. Something that is now so easy to jot down was initially a very strong signal for us that we were thinking in the right direction. Ehssan invests rarely and if he is intending to do so, it must mean something — chiefly that we were taking the right approach and that we had the right team in place.
We realized quickly that Cookies was attracting interest from business angels.
It was soon clear to my co-founder Lamine and me that we wanted Ehssan on board as an investor. The situation was this: We realized quickly that Cookies was attracting interest from business angels. These were more or less tech enthusiasts who immediately see a good idea as being “the next Facebook” — which is good for the ego, but not the best basis for working together.
Ehssan’s tech enthusiasm and professionalism were self-evident. We knew that he was a visionary who thought outside the box as well as being an experienced investor. We didn’t need references, nor did we need to find out about his other investments. As founder of studiVZ and an investor in Brands-4-Friends, Käuferportal and Mister Spex, he has proved that he is at the cutting edge of the European startup scene.
The right decision?
It’s difficult to talk in terms of a strategic decision. When you’ve still not got a final product and instead begun to realize an idea with just a handful of people, “strategy” is rather a grand term.
We convinced Ehssan with a pitch in which we showed him a product demo, explained our vision, and chatted with him (over Persian pastries and tea) for a long, long time. He quickly understood our ideas and told us that the team played a large part in his decision to invest.
It was important for Lamine and I that Ehssan was also aware of all the risks — there were and are more than a few — so that any investment would not be influenced by our private relationship. This approach is still important to us today — even though it requires a lot of sensitivity and patience to separate the personal from the professional.
Experienced angels — are they important?
A little while later, we realized how useful it is to have an experienced angel investor on board. An experienced investor can use their expertise and sensibility to quickly differentiate important conversations from unimportant. That’s the case with Ehssan.
What did we gain from it? We used our time more efficiently and our discussions with potential partners and other investors were more productive. That doesn’t sound too impressive, but anyone who’s ever tried fundraising knows how important it is.
When you have a good product, a lot of doors open by themselves.
And yes, having a well-known investor on board is of course a great help. When you have a good product, a lot of doors open by themselves. A good investor can make those doors open a bit faster.
Some time later we closed our first financing round with a number of well-known investors and angels on board, which brought us a lot of press attention. Alongside Holtzbrinck Ventures and Ehssan Dariani, we convinced some of the movers and shakers behind Wunderlist, as well as Dennis Bemmann (studiVZ, Bergfürst), and Raffael Johnen (auxmoney) to invest in us. I’d like to share a few of the lessons that we learned from this process.
The first VC — it’s beginning to get serious
Of course, there’s still a long way to go for some of the first angels. Anyone who wants to not only pay for an office and a few MacBooks, but also turn the finance industry on its head and change the way we handle money every day, needs substantially more money — and perseverance.
When you’re dealing with larger institutional investors like VCs, you should only speak with them once you’re ready for it. At the absolute earliest, this will be once you have a demonstrable prototype and a well-thought-through business model, your strategy towards growth and scaling has been optimized, and your go-to-market strategy roughly defined.
Shortly thereafter comes the question: With whom do you proceed? Instead of listening too much to positive press or going with your gut feeling, you should come up with criteria that a potential investor must fulfill. For us, integrity was extremely important — not just the integrity of the fund but of the investment managers responsible.
In the world of venture capital, negotiations tend to happen on a very personal level.
Bilateral due diligence and a careful risk assessment must also be carried out here. In the world of venture capital, negotiations tend to happen on a very personal level. Excel tables are all well and good but often it’s like a date — both sides will realize after five minutes if the relationship is going to work or not. Of course various negotiations and technical, financial, and legal due diligence have to be done, but the first five minutes will decide whether it will come to that. In the end, as in every relationship, each party tries to optimize their interests to their advantage, sometimes obviously, sometimes more subtly. Both sides have to make concessions and accept compromises so that the relationship can bear fruit.
If your startup has a product with great potential, you should allow yourself the self-confidence to which you’re entitled. Working with a venture-capital fund that you’re not convinced by or only because they’re a big name is a wrong decision — and usually a fatal one.
We were lucky enough to get to know Holtzbrinck Ventures, which led us to two realizations. The first was that we got along well on a personal level; the second was that we recognized in Holtzbrinck a VC that, aside from pure financing, would bring Cookies forward with its huge wealth of experience. Holtzbrinck understood our vision and declared themselves ready to support our project.
How do you convince investors? CV versus Business Plan versus Product
At Cookies, our target was not just to build a simple and great-looking product that solved an everyday problem, but also to set new standards in critical areas like data security and data protection in money transfers. Integrity, whether that of colleagues or investors, was therefore very important to us from the beginning.
However, the interesting question is not only why we went for certain investors but how we convinced the investors of ourselves.
You should also be aware of what is usually important to good investors. Firstly: the team. The team’s resumes and the successful interplay of various individual roles in the collective, like you would find in a world-classorchestra, are top of the list according to my experience. Most initial ideas change radically in the course of the development process. What’s the point of an initial good idea if it has to be fundamentally changed and the team is then unable to carry that out? This is why a fast-acting, adaptable team is fundamental to any startup that is continually reinventing itself.
But qualities like appearance, charisma, and sharp thinking count for a lot.
You can’t tell a good team simply by where its members worked previously — although that does play a part. People who have worked in good jobs and forged a career off their own bat no longer need to prove qualities like determination and diligence. But qualities like appearance, charisma, and sharp thinking count for a lot. People who give clever, precise, and well-thought-out answers to questions, instead of making something up on the spot, leave an impression of greater trustworthiness. Constant questioning of the process, quick-wittedness, a can-do attitude, and a natural curiosity are further characteristics that investors (and we) find especially important.
Equally important is the product. Why it’s important doesn’t require any explanation. Regardless of how competent the founders appear, a poor, half-baked product is no reason for an investor to throw money at founders who are impressive on paper. Sustainability and scalability are two examples of points in which every investor is interested.
Lastly, for me, comes the business plan. The importance of the business plan is conveyed wrongly in business schools. One the one hand, that’s because good resumes, references, and product ideas can only be taught up to a point. On the other hand, relevant key performance indicators are grossly underestimated. Business schools have long prepared their students for the corporate world and asked them to analyze 100-page annual statements from major listed corporations. Such knowledge only helps a startup with a weak turnover realistically plan and budget up to a point. If you’ve never in your career created a professional business plan or at the very least analyzed one, you should without question get professional help from people who themselves have founded businesses. Advisors, bankers etc. who have worked closely with founders and gained a lot of experience with business plans can also be a huge help here.
Do investors come of their own accord?
What investors also do is exchange ideas, monitor the scene intently, and interest themselves in new, disruptive ideas. They are proactive. If you haven’t hidden yourself away in your office then they’ll approach you, or you’ll meet them at events and fall into conversation — even when you’re officially still in “stealth mode”. That’s how it was at Cookies.
It’ll only become more difficult if investors who had actually been enthused by the idea realize that the startup in question is a pre-product startup that can’t get by on a few thousand euros — after all, we are operating in a highly regulated and heavily fragmented industry.
There’s no secret formula for good seed investment rounds
In Germany it can be quite difficult if you don’t show the investors enough to convince them of the potential success of the idea, whether it’s the state of the product, the team, or other investors who are already on board. There’s no secret formula for good seed investment rounds, only pieces of advice that I’m happy to pass on and that I ask everyone to examine individually before deciding to follow them. We were lucky to have fair, experienced people on our side from whom we could learn a lot. One of the lessons was always to question pieces of advice ;)
Due diligence — it’s not all about money
As I’ve said, it’s important to carry out bilateral due diligence and to learn as much as possible about investors, investment managers, and angels.
Gather references as if they were potential employees, as you’ll also have to go through good times and bad times with a VC or an angel. A nice sum of money in your bank account is great, an investor with whom you’re personally and professionally incompatible less so.
Whoever invests should ideally deliver added value to the business over and above the money they’re investing.
Whoever invests should ideally deliver added value to the business over and above the money they’re investing. “Smart money” is what we call it, and we profit from it every day.
Working with investors is a challenge, as I can confirm from my time working as a portfolio manager of an institutional fund. An investor’s work involves helping out with advice and a network of experts and at the same time critically scrutinizing the founding team, the product, the business model, and the business methods.
In difficult times it can make your life appreciably harder. On the other hand, a good angel or investor can help boost a business so it can progress strongly. They can identify new business models or markets, or help the business to constantly reinvent itself instead of jogging on the spot. We wanted to have investors like that from the beginning.
Last but not least…
There’s still a little bit more. If a business doesn’t finance growth itself and relies on outside capital, you should usually take less money in the seed round and focus on securing follow-up financing sooner rather than later. Often you’ll see quickly whether or not an idea has had the desired success. That’s why you shouldn’t take a breather for a single second with regard to money. An investment round can and should create pressure and anyone who wants to build a strong product and a sustainable business should be able to withstand this pressure more than once.
Lastly: sleep on things for a night. Regardless of how good and tempting an offer is, don’t arrive at an instant decision. Good offers don’t go away overnight and you shouldn’t make an important decision of this nature in the heat of the moment — after all, you don’t introduce the person you met on Tinder to the family the day after your first date.
If you have questions, suggestions, or criticisms, please leave a comment. I’ll try to answer as many as I can.
Garry Krugljakow is Co-Founder and Head of Business at Cookies. Being a former asset manager and banker in the UK, Germany and Switzerland, he left the banking industry and joined the German FinTech startup Number26, where he met Lamine Cheloufi. Together they founded Cookies in early 2015. With Cookies, you can send and receive money in real-time — TechCrunch called it the “Venmo of Europe”. The launch of the Cookies app is planned for the first quarter of 2016. You can sign up for the beta here.