Security startup confessions: Looking for investors

security startup investorsMy name is Kai Roer and I am a co-founder of European security startup CTLRe, and these are my confessions. I hope you will learn from my struggles, and appreciate the choices startups make when security matters. I will share experiences from my own startups (my first was in 1994), and things I have learned by watching and advising numerous other startups around the world.

Running a startup is an amazing experience, and a lot like riding a roller coaster. The past couple of weeks at CTLRe are a good example of this thrilling ride, as we are preparing our first investment round.

As we are a small team, and all members are focused on their own parts of the business, it’s a task that largely falls on me. As the CEO, it’s my responsibility to make sure we have the necessary finances for our operations.

In my opinion, spending time on procuring external investment is a necessary evil that should be kept to a minimum. The time we spend on finding investors that will be a good fit for CLTRe trails after several other priorities:

My single most important metric as the company grows. I believe that if you cannot demonstrate that people are willing to pay for your products and/or services, it’s time to go back to the drawing board, or team up with better salespeople than yourself. At CLTRe, we focus on making business every step of the way, and that’s our priority every day, week and month.

We provide security services to our customers, and we need to demonstrate a reasonable ability to handle data, systems and processes in a secure way. I know we spend more time on security than many non-security startups, but I think we can improve on that, too (more on that later).

Product development
We are a software company, which means we need to develop, distribute, maintain and operate our software. We make mistakes and blunders, but we do our best to turn them into learning experiences.

Customer happiness
I want our customers to be customers for life. We go the extra mile to ensure that we manage expectations, handle incidents, and provide relevance to our customers.

To me, these priorities supersede funding any day. But running low on funding is a huge risk for any company, and doubly so for a startup.

The risks tied to raising funds

There are quite a few reasons for focusing on funding: you increase your chances of success, ability to pay out salaries, opportunities for international growth, you can hire more skilled people, and so on.

But there are also a number of risks tied to raising funds.

For example, during their fund-raising periods, some startups focus solely on finding and pitching to investors. This may help them raise funds faster and therefore get back to their real business faster, but it also opens them up to the risk of no-progress. Stopping all activities because the founders focus exclusively on investors may leave the whole company dead in the water, with no product development, no customer development, and potentially, ultimately, no investors either.

By having my priorities straight, I make sure that we run business as usual while we raise money. This may require more work from us, and it will indeed delay the process because we have to focus on business in addition to flirting with investors, but the upside is that we continue to roll out to new customers, to close deals, and to develop our product.

Choosing to do it this way we run the risk of running out of cash before we close an investor, but let’s be honest here: all startups (and other companies, too) run that risk when looking for investments.

Imagine the scenario in which you fail to secure the funding you need, and your company has not produced any relevant progress on customer acquisition or product development during the time you tried to raise money. Now you have no funding, no progress, no new customers, and a stale product. That is much worse than having no funding, but having more customers, demonstrated progress and a product in constant development.

At least, that is my rationale.

Raising funds in Europe

Raising money is an interesting, and definitely a learning experience.

Most of the information available on the process of raising funds is based on the US-based venture capital model, where companies will beg, steal, and cheat in order to get cash from a seed or venture fund. Since our company is located in Europe, not all those principles and best-practices apply. (Unless, of course, we attempt to raise funds in the US.)

I found the figuring out the landscape difficult. There are government grants for startups on the local, national and EU-level, and everybody urges you to apply, but no-one tells you how difficult it is to be receive one. The scope of the grants differs, of course, as does the application process. Getting a government grant is a job on its own, and many grants seem more like lotteries than anything else (the EU Fast Track to Innovation – FTTI is an example of such a plot). Other grants are very relevant and available, like the Innovation Norway Startup Grant.

Finding, applying for, and waiting for government grants is taxing for a company, and can take away focus from running the business. The truth of the often repeated saying that grants are “free money” is highly dependent on the amount of work required to secure the grant, multiplied by the size of the grant, multiplied by the lottery factor. It’s no wonder, then, that special consulting companies seem to thrive on writing applications on behalf of other companies.

Another thing that startups are forced to do in order to attract investment is to be part of the startup scene, wasting a lot of energy trying to impress people they think might be investors. In my personal experience, this is a waste of time. You end up chasing rainbows, only to find a consultant offering services to help you tune your pitch, introduce you to potential investors, or worse: you forget your customers and your product. I have gone through one startup pitching competition, and I don’t think I will do that again. I think that the startup scene, to a large extent, is a scam – and I’m not a fan of scams.

If you accept my opinion on this and avoid the startup scene, how, then, do you find investors?

I think networking is a good strategy. Use your connections, ask for introductions, and aim your efforts at the few investors who are relevant to your niche.

There are a lot of preparations to be made before approaching them. The more you know about the landscape, the target, and the surroundings, the more likely you are to succeed.

One venture capitalist I know said to me once: “We review 800 applications every year. We only invest in 1 percent of that. But how many other arenas do you know that comes with a 1% success rate?” While this proposition might resemble the EU-grant lottery ticket scenario, there is one huge difference: you know who you talk to, and you know their interests. That enables you to tune your message, to hone in on your target. More importantly, unless you blow it completely, you have a contact who you can turn to in the future, even if they choose not to invest in this round.

There is also equity crowdfunding, where you offer investors a share in your company in exchange for funds. I think it is a viable investor strategy for many companies, especially those in the consumer market – they can use a crowdfunding round to gain tracking and brand awareness in their market space.

I am not so sure about the approach when it comes to business-to-business, as I think successful crowdfunding requires interest from a broad audience. Finally, when a company offers a niche product in a niche market (like CTLRe does), I’m not sure equity crowdfunding is worth the effort, but I think it may be an interesting experiment to try it out. Such an experience could also help tune our team on the marketing message, something that is critical for all companies.

I think that it’s clear by now that I prefer a mixed strategy when it comes to funding.

I also think that funding a company solely on external capital is a high-risk game, both in the short term (you may not be able to secure the funds you need), and in long term (you may have to give up control, which may lead to the company going into an unwanted direction).

In addition to that, I’m not a fan of short-sighted capitalism, whose only purpose is to fill the pockets of few. I believe distributed wealth benefits society. My flirting with investors these days is, therefore, done with a certain level of cognitive dissonance.

Other columns from this series:

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