Early money is like yeast: on fundraising in the startup world

Over the last couple of years, the Merixstudio team served several founders operating with no or very limited external funding. These startuppers demonstrated a genuine willingness to validate their ideas, needed a second opinion, or had been requested by investors to bring estimates, recommendations, or prototypes to the table. Those activities aimed to support pitching and fundraising purposes and have been mainly covered through our workshop sessions and discovery processes.

Armed with loads of experience, we gained insights into how great the pre-seed startup ecosystem is, as it attracts both young graduates and experts with years of commercial experience in verticals like financial, edtech, healthcare, or tourism. And so, we decided to take a deeper look into this mysterious and fascinating world, eager to learn even more and become a more empathic service provider.

In the second half of 2020, right in the middle of the COVID-19 pandemic, we surveyed almost a quarter thousand founders and entrepreneurs who are yet to enter the market. Among the things we asked about were their fundraising experiences, e.g. the amount of financial support they applied for, sources of fundraising, and eventual success of these efforts.

The outcome of this effort is the State of the Early-Stage Startups 2021 report, a comprehensive overview of challenges met by every startup founder. We share it with pride and excitement. Let's take a sneak peek into it!

Don’t wait, the time will never be just right

One of our goals was to understand how founders receive their initial funding round and what supports – or disrupts – that process. Of course, every case is different as healthcare SaaS for veterinarians may adopt a different business model than a solar energy marketplace. Nonetheless, we managed to recognize particular trends, actors, and sources that allow entrepreneurs to make their first step.

We learned that over 70% of founders who either failed to secure funds or haven’t attempted to do so, would rather rely on their own funds instead of seeking the help of banks (31%), accelerators (50%), or angel investors (64%). It seems like many of them wouldn't like to share their company with others, at least while taking baby steps.

We also learned that business angels are generally considered more attractive investors than venture capitalists. This made us ask further questions: do startuppers need a more human touch, would they have more trust towards individuals, or are they just living a dream, that everyone will eventually meet their Peter Thiel as Mark Zuckerberg did.

To further explain, angel investors are usually business pros with many endeavors behind their back. They tend to invest their own money in several companies at once, expecting that some will turn into profit. Their business model assumes that as the company value increases, business angels may expect a return in cash or a simultaneous increase in their shares’ value. Venture capital companies work similarly; the main difference, however, is they use pooled money coming from other investors, usually investing in various companies at once to balance their risks. 

📚 Curious what venture capitalists and business angels think about tech startups nearshoring? Here you'll find the answers.

Another source of funding considered in our surveys was accelerators: public, semi-public, or private institutions, providing mentorship, expertise, and some (usually deficient) funding level – although their role is primarily to validate the concept before development kickoff. A collaboration with an accelerator may not result in significant funding, but it can support the prototyping process, increase founders' acumen and strengthen their professional network. In fact, these are exactly the advantages pointed out by our more experienced founder-interviewees like Kabeer Chopra, the co-founder of Burrow:

The breaking point for us was joining Y Combinator, where we got to pick up some more checks. Before, we concentrated on the physical product, but YC helped us shift focus to the sales model. This allowed us to get more traction, and on Demo Day, we turned out to be one of few companies demonstrating revenue. That helped to bring investors on our side.

Continuous improvement is better than delayed perfection

Let’s restate the obvious: the early days of every venture are different. Validating a celebrity-driven cryptocurrency platform in the Middle East demands different research tools than a social travel or tourism app for West European hitchhikers. As one may expect, sometimes it’s simply impossible for the early-stage startup team to possess all the skills necessary to objectively assess and improve their business idea – which is why we were curious to find out how founders approach the validation phase.

What’s most reassuring, is that almost 90% of the surveyed entrepreneurs did validate or plan to validate their idea with end-users. How?

It turns out that 40-43% would like to validate business ideas fully in-house, while 14-17% consider hiring freelancers and 12-13% plan to use the product design company’s help. We believe that in the latter group we’ll find founders who, at some point of their professional journey, have learned the hard way that internal knowledge may not be enough – especially when their team isn’t big enough to cover all necessary skills.

As part of our survey, we also asked founders about one of the most popular validation tools: a prototype. We found out that over 70% of founders built or plan to build one. Among the most frequently cited reasons for doing so are the desire to uncover the end-users’ needs (73%), testing and gathering feedback (54%), and gathering requirements (48%).

And although the above chart says nothing about a prototype supporting fundraising attempts, the vast majority (68%) of the questioned startuppers believe that a prototype is important or very important to investors.

📙 Check out our comprehensive guide to building software prototypes.

The secret of getting ahead is getting started

As we stated above, launching a startup with a bang requires a wide range of skills – and it’s only natural for the small founding teams to not have them all immediately. Therefore, a founder interested in validation, prototyping, and estimation of their business idea may sync with our team to perform all of that – and more – at a low entry-level.

To enable that, we came up with Startup DNA, a service that spans:

• (remote) product design workshops to validate the idea,
• branding and prototyping,
• pre-development and estimation,
• presentation and pitch deck.

We believe that the greatest value of Startup DNA lies in involving an interdisciplinary team in the discovery process from the very beginning. The idea behind this is to review every project from different angles: seek optimal user experience, pick relevant libraries and integrations, discuss the best AWS setup, and so on.

With the support of experienced software development specialists, the founder gets to choose particular solutions while being aware of their pros and cons, as well as high-level costs of development. Such knowledge will certainly become a substantial argument in front of potential investors. 

We are all in the gutter, but some of us are looking at the stars

In recent years, Merixstudio supported several startups in their design, prototyping, and engineering projects, allowing them to seek further investment rounds. Some of our clients approached us at a very early stage, with no or minimal funding. Around 50% of startups that we have worked with received funding rounds on a high level. For us, this is proof that we indeed are much more than just a humble sub-contractor – we’re the supporters of well-knitted products, and we have some solid proofs for that.

• Genuine Impact

Time of collaboration: August 2019 - March 2020, as well as ad-hoc collaboration later on
Success: in Q4 2020 raised GBP 900k instead of the estimated GBP 150k; got 750 investors on board, increased team from 2 to 10+ people
How we helped achieve it: Merixstudio created a full prototype, including 87 unique views before building the application's frontend. The increasing volume of users allowed company founders to gather another funding round through crowdfunding.

• Sendinblue

Time of collaboration: March 2018 - December 2018
Success: Series B raised in September 2020; new offices opened worldwide, including Seattle (USA)
How we helped achieve it: For over a year, Merixstudio provided Sendinblue with the support of a self-managed team of 8 professionals skilled in React, PHP/Symfony, UX, and API testing services. The smooth collaboration in a culturally-diverse multi-timezone setup facilitated the rapid scale-up of the startup.

💡 And if you've been wondering how to build an app like Sendinblue or Mailchimp, we've got you covered.

• SportsHi

Time of collaboration: September 2017 - January 2018
Success: Preseed round of USD 1.1M raised in January 2020
How we helped achieve it: Merixstudio built an MVP based on complex UI assets delivered by the client in a short timespan. Later on, the project was handed over to the clients’ team. Increasing the community of users and SportsHi ambassadors result in 1.1 pre-seed funding.

• Rosalyn

Time of collaboration: December 2019 - today
Success: Seed round of USD 2.2M raised in November 2020
How we helped achieve it: Rosalyn provides virtual assessment and proctoring technology. Whereas the client is in charge of AI and computer vision, our team supports them in building a web exam-taking platform that incorporates e-commerce capabilities. As a result of the development, Rosalyn acquired a strategic investor and continues to grow.

🎤 Did Rosalyn’s story spark your interest? To learn more about the edtech startup’s road to success, read our interview with its co-founder, Noor Akbari.

Wrinkles should merely indicate where the smiles have been

Working in a startup world is a never-ending learning process. A startup Tao isn't about reaching the end of the road but walking without stopping. We might even say that following every workshop and every delivered prototype we realize how little we know: there's always a new factor, a new library, a brand new niche to be discovered. And yet, there’s no denying that it’s an exciting education - and we love stepping on this path yet again with every new startup client.

Keen on embarking on an entrepreneurial journey with us? Get in touch with our team and let’s talk about your startup DNA!