why they call it funding round when they mean survival

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Just do a little Google search on “financing rounds” and get a lot of news about various Spanish startups that have managed to attract investment, in more or less large amounts.

Most of the ones that do get published, in fact, are because the numbers add up to enough zeros to be newsworthy, allowing these entrepreneurs to rank even among would-be unicorns. But along the way there are many, many other operations that sometimes add up to 100,000 euros, although journalists receive them in the form of a Press Release.

Faced with those tens or hundreds of millions of euros that some startups receive, can an amount of just one hundred thousand euros be held as support for a business idea? Do these really work? small injections capital? Is there an economic bubble in entrepreneurship investment? And, above all, is there life beyond the investment rounds? Why do some run away from this economic system?

“With a hundred thousand you don’t even pay a developer”

Andoni Alfaro he is an investor. He acknowledges that with a round of 100,000 euros an entrepreneur could not even pay a developer (between salary and costs), but maintains that this amount is still a lot of money, especially in the initial phases of a project and, above all, if the money it does not come out of the pocket of the entrepreneur.

For this reason, this investor supports this type of small rounds because “each round serves to validate a hypothesis,” he explains, “which allows the startup to go to the next level and meet objectives and stages.” Because, although later we remember great operations such as the 450 million that Glovo obtained, the 440 million of JobandTalent or even the 40 million of Seedtag, most of the unicorns started with rounds much smaller.

For this reason, and although with important nuances, the validity of the small rounds is something that also blesses Eduardo Manchon, entrepreneur of projects like Panoramio (which ended up being bought by Google). “Validating a product, an idea, can be done with almost no money,” he details, although this will depend a lot on the type of company. “If it’s pure software, you hardly have any expenses. If you’re setting up an ecommerce, then we’re talking about something else.”

“Many times, entrepreneurs seem to have no respect for people’s money. It’s fine to explore, but when you do it with someone else’s money, you have to have respect, because you have to invest well so as not to waste it.” For this reason, he considers that “the businessman has to feel that the money is fair.”

Investing is a risky sport

Photo Andoni

The investors with whom we have spoken agree that this activity carries risks and, in many cases, failures of the bets made. Of every 10 startups that receive investment beyond the FFF (family, friends and foolsan expression that is usually used to refer to the first investors of an idea: family, friends and some crazy people), “four or five will die completely. In two or three the investment will be more or less recovered and it will be a self-employment project of the entrepreneur and only one or two will go more or less well,” explains Alfaro, who considers a good return on investment to receive between three or four times what was invested in the latter.

For that to happen, a bigger investor always has to come expand the round of previous investment, which means, in many cases, that these first small investors end up selling their stake in the startup.

David Fernandez manages higher capital investment funds. In his case, he reckons that of the dozen investments he has right now, at most three will turn out to be a good move. “It’s not a bad ratio,” he assures. “Everyone aspires to make a multiple of 20, but having a 2.5 is a success,” he says. What each investor looks for in a project to invest in depends almost as much as the investor himself. What he is going to claim in return, too.

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Andoni Alfaro, for example, prefers to diversify a lot where he bets his money because, he admits, many times you have no idea how the projects are going to go. “If I see that I end up misaligned, I don’t wait and, with recovering what I invested, it’s worth it. If I’m aligned and I create the project, I try to invest again and accompany the entrepreneur. That’s where an interesting multiple occurs,” he explains.

Photo David

Fernández analyzes well who are the previous investors of a project. “There are many investors who, because they have invested 25,000 euros, believe they have too many rights over the company and crush the entrepreneur,” he reflects. He also does not see favorably that the company has had many investors to whom the founders have had to give up a large percentage of their company. “It’s very important for founders to be very judicious when it comes to choosing investors,” he explains.

as it exposes Angel Pineda, founder of the Orizon company, “there are many entrepreneurs who have abused small rounds of investment and have ended up giving up so much percentage that, in the end, they are employees of the company they founded.” In this sense, Manchón considers that the investor “is always painted as a Dracula, but that is not the case” and agrees with Fernández that, in reality, it’s on the weak side of the business.

“He looks for the opportunities and, in many cases, he has no experience,” he reflects.

Leftover “pasta” in the market

Both entrepreneurs and investors recognize that there is excess liquidity in the market and that many investments (large and small) are taking place in the startup sector in Spain.

Photo Edward

So much so that there is no fear even talk about a certain bubble. “I don’t know when it’s going to die, but I’d rather this excess cash doesn’t exist because it’s not good for the market, since it creates an unreal situation,” says Alfaro, who believes that, in these times, investors “become less demanding and startups don’t value money that much. Therefore, he considers it necessary to correct this situation, in which the value of a company and its valuation are close. “We will give each other a little slap, but everything will return to normal,” he ventures.

Manchón agrees that the sector has not crashed yet. Or at least not enough. But he assures that these movements, rounds and funds of venture capital “They are necessary for Spain to move to another level of productivity” because, according to him, “to make technology at a higher level means spending years in the red.” To justify this reasoning, he uses a simile: Pokemon Go need 100 million to start to speak. “Some funds have 100 million but they can’t fit it all into a single project. And there aren’t any entrepreneurs in that category either,” she says.

Pineda believes that there is a lot of fashion in everything that is said and talked about investment rounds, with “a very large part of the investment that is not being talked about being allocated to the cloud world”.

When investors are not wanted

Although the entrepreneurship sector is experiencing a good moment and there are many investments available, there are entrepreneurs who flee from this system.

Manchón, for example, acknowledges that he prefers to be an entrepreneurial “boostrapper” in the sense that not looking for money to finance their projects “because that limits me. “If the project works well, it starts and, without spending a dime on publicity, it ends up working,” he adds. Another case is that of Ángel Pineda, founder of Orizon, a company whose main clients are banks. He assures that it was these entities that began to hire them, almost on a personal level.

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“We started billing from the beginning. When we saw that we could automate our operations, that was when we looked for financing. We went directly to the banks. We got into debt, we asked for a CDTI project…”, he recalls, assuring that the investors who ended up entering also valued that debt staff he had hired to start the business. “Many entrepreneurs do not want to go into debt. I respect that, but if you are so sure of your company, you should be the first to bet and take risks for it,” he reflects.

In the end, and regardless of the spirit of the startup, everyone agrees that when mentioning rounds of financing we are talking about a pure and simple financial businessin which some bet to end up collecting profits when others decide to double down.

“This is a financial business, with ratios that are met. For a good investment to come out, you have to have invested a lot and have a large portfolio, in which there will be failures. The investments that are going well are the ones that pay for the party” , admits Alfaro, who considers that the later the phase in which you invest, the less risk you run. “It’s a relay race: FFF, Business Angels, Venture Capital (some risk) and then funds that end up accompanying and selling the company or taking it public,” he sums up.

In this financial game, Manchón explains that the rounds are “to be spent” and to be in the red, not for profitability. “You have to know what you’re playing. The round is given to you so you can spend it, so you can hire people, many of whom you’re going to have to fire, you’re going to generate friction… They don’t give you a round to be profitable , but to make the company great. You are growing and you have to be in negative numbers because the expenses are great”.

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Pineda, however, warns about the consequences that these rounds can have. “A lot of times, if you don’t ask for a lot of money, they don’t think you’re ambitious. You might only need a million, but they end up asking for five, burning through money to go into losses. Once you’re at a loss, you have no choice but to keep making rounds to finance you”, in a kind of wheel that can end up being dangerous.

As Jordi Plana, founder and CEO of Beezy, pointed out about the debt contracted with Goldman Sachs to finance his startup, these investment companies “they are financial sharks“, in the sense that “they are very good and smarter than you, so they will always earn money.” In his experience, when starting a business, “you have to go through the tube to be in this business. Investors squeeze you, but they don’t drown you. And they make you a better company”, even if it is at the cost of continuing to owe money.

So, who knows if among the many projects that are beginning to receive their first 100,000 euros to launch their idea, the next unicorn in the Spanish market will be.

Image: pexels

Just do a little Google search on “financing rounds” and get a lot of news about various Spanish startups that…

Just do a little Google search on “financing rounds” and get a lot of news about various Spanish startups that…

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