Fundraising for your platform startup: Insights from the best VCs

The past decade has been a bullish one for platform investment. Digital platform businesses have continually caught the attention of venture capital – and the generous funding to match. Now, the investment environment is more discerning, with fewer IPOs, increased scrutiny and a renewed focus on profitability. As the emphasis on user acquisition and market share shifts toward sustainable growth instead, platforms and investors alike are recalibrating their approach and orientating toward long-term success. So what’s the impact if you’re thinking of fundraising for your platform startup in 2024?

Securing exponential returns and thinking long term

“We are really investing on the power of conviction that a founder has: their vision for what the future looks like, and our confidence in their ability to execute [on that vision]”, explains Camilla Dolan, General Partner at Eka Ventures. She’s a founding partner of the fund, which provides seed and Series A venture capital. Since their beginnings in 2018, Eka Ventures has primarily invested in consumer technology businesses that focus on health or the climate. “We believe that those are two segments where there’s huge opportunity to build the next wave of platform businesses”, Camilla says. “Health is 10% of global GDP and continues to grow – and there isn’t a clear consumer or platform winner in that space at the moment – and climate is earmarked to be a trillion-dollar-plus industry.”

This sense of ambition and vision is something that Andrin Bachmann also looks for in platform founders. As Partner and Co-Founder at Piton Capital, he primarily invests in platforms. “We invest typically at the early stages into businesses that we think have to potential to develop into network-effects businesses”, he tells us. Andrin’s years of experience as an investor allow him to pick up on new trends and yet spot familiar themes in the business and investment landscape. “The beauty of [platform] businesses is that the core concept remains intact”, he says. “Fundamentally, network effects are as old as humanity, right?” While the basics may look the same, the particulars have changed over time. “Whether it’s supply and demand, whether it’s communication systems – it’s a very natural, almost biological construct. But the technologies that you can access change over time, so you have to adapt”, he adds.

Piton Capital’s first fund made highly consumer-centric investments, which was a logical move considering how mobile technology was gaining dominance and changing consumer behaviour at the time. Subsequent funds have similarly responded to influential technologies and emerging or evolving industries, says Andrin. “We’ve invested in between 50 and 60 companies now over the last 15 years. We’re on our fourth fund at the moment and [are] very excited to see about the next wave of platforms.”

At Eka Ventures, the concentration on businesses making positive environmental and social system change is a helpful selection criterion for Camilla and her partners. “We invest, at an overall level, in something we call commercial impact. Underneath that, we have this specific thesis around shared value”, she says, explaining that they look for businesses creating commercial value in tandem with a positive output in climate or health. Notably, Eka Ventures is drawn to companies with imagination and vision. “We don’t currently invest in carbon capture or some of the more infrastructure-led players. We are looking at the players that are trying to shift supply chains into the decarbonized future”, Camilla tells us.

The winners and losers in today’s venture capital paradigm

In the climate sector and elsewhere, more and more businesses are looking toward the future, and today’s funding landscape is pivoting in a similar direction. The implication for platforms is that some are well-positioned to benefit from a more conservative VC environment, while others stand to miss out. “This change in market environment is really favoring entrepreneurs that are taking that long-term view: focusing on compounding and becoming a talent magnet for people that still want to build the companies of the future”, Camilla thinks.

In Andrin’s view, the past decade of looser pursestrings came with its drawbacks. “On the face of it, [the economy in 2021] looked great for entrepreneurs because money was easy”, he says. “But at the end of the day, the entrepreneurs who really want to build something for the long term actually didn’t benefit very much, because at the same time as they were [being] funded, five of their competitors were being funded by irrational capital. It probably kept markets – that should concentrate around a winner – competitive for much longer than was reasonable.” 

Fewer competitors may come with an opportunity for strong platforms to rise to the top. “We’re in a very different environment now”, Andrin continues. “The founders who are resilient [and] focused on actually building real value for customers are the beneficiaries of a more rational capital market environment. We are increasingly focused on founders who also have an ability to get to profitability much earlier in the journey and are not reliant on venture capital in the way that people would’ve been in 2021.”

“I think the times when you basically burn money for 10 years, frankly, are largely behind us, and I think that’s a good thing.”

 

Andrin Bachmann, Partner, Piton Capital

Joe Schorge, Founder & Managing Partner at Isomer Capital, doesn’t disagree. “Overfunding can kill a company in the same way underfunding can”, he says. “You get too much money into a company because of ‘gross optimism’ and the team spends that money, it has no operating metrics to show for and can’t raise again and then [the company is] gone.” Isomer’s first fund was established in 2016, centred on opportunities in European technology, and Joe has watched startups come and go in this space. “A lot of times, the criticism of early-stage tech is [that startups are] building a product nobody wants,” he notes. Looking forward, he thinks it likely that the discussion around capital investment will continue to shift toward ensuring profitability.

For companies that can demonstrate their ability to build for the long term, funding is still available, in Camilla’s opinion. “If you’re a company that has really strong network effects, and you can evidence some of those factors like the CAC coming down, the referral rate going up, really good customer love – whether it’s B2B or on the consumer side – there is still capital out there to raise”, she thinks. However, businesses without clear network efforts or burdened by high expenditures will struggle. Companies like these, Camilla says, need to think about how to improve their unit economics quickly. That could mean increasing corporate partnerships, transitioning to a platform model or slowing down on new roll-outs in order to take a different shape as a business.

Although early-stage funding is often characterised by careful scrutiny of a company’s strategic roadmap and vision, Andrin thinks that the same may be less true of investments in more mature businesses. “For the late-stage rounds, you have a brutally bifurcated market now”, he says. “A bunch of the late-stage investors are becoming quite formulaic in how they think about businesses – of course, if you have a SaaS business with 90% gross margin, 70% growth, [and] extremely high net revenue retention, that’s easy to fund.” The large investment firms that typically participate in late-stage funding rounds are becoming increasingly institutional, Andrin believes, which could mean that people with relatively limited practical experience are responsible for making funding decisions.

Between the two predictable extremes of ‘successful’ or ‘unsuccessful’, there are also companies with more subtle stories, says Andrin, and these businesses could have a more difficult time securing funding in the current environment. “There are a few companies that are at risk of not getting the capital they deserve”, he thinks. Yet again, this puts pressure on businesses to prove their mettle and resilience – and Camilla thinks some will rise to the challenge. “We’re seeing creativity in a way that we just hadn’t seen in two years. I think that companies are going to come out stronger”, she says.

Key ingredients for securing investment in 2024

As digital platforms weigh up their chances of securing funding under the current market conditions, there are several decisive factors that investors like Camilla look for. “Whether you’re pre-seed and are raising your very first capital, or you’re series A […] and you’ve got a little bit of traction, for us, it comes back to the same core tenets”, she reiterates. “Are you, as a founder, resilient and optimistic about what the future looks like?” The recent market shifts are not an isolated historical incident, she notes. “Businesses change over time, so we’re investing in you as a leader and your ability to ride [out] lots and lots of different dynamics. […] We need that leader to be able to continually execute against the vision and the plan that they originally set out. And what we’ve learned is that really comes down to that founder having a vision of what the future looks like and then not really allowing the market dynamics to get in the way.”

Although Eka Ventures conducts standard market mapping and due diligence investigations into product viability, the fund tries to operate on good faith with entrepreneurs. Camilla remembers speaking with the founder and CEO of Gousto, a meal-kit retailer that was one of her earliest investments. She was sceptical of the estimated addressable market, especially considering the product’s slightly higher price point. Time has proven her wrong, Camilla says, with Gousto’s revenue not only significantly surpassing their estimated market cap, but also her own projections for the maximum total market size.

“Trust entrepreneurs. They have a vision that’s normally beyond where we are as investors”.

 

Camilla Dolan, GEneral Partner, Eka Ventures

At the earliest stages, Camilla says, Eka Ventures uses psychometrics to evaluate whether prospective investments have this kind of credible, visionary leadership in place. For subsequent funding rounds, other considerations come into play, such as talent retention and network effects. She shares the kinds of questions that she and her partners ask themselves when evaluating a company and its founder for potential investment: “Have you been able to hire and retain really incredible talent? Are you able to articulate a vision in a way that other stakeholders are coming along with you, and do we think you’re moving towards building something that’s going to create this compounding value and network effects, rather than chasing revenue today?”

When a business approaches their fund for Series A capital, Camilla and her partners focus tightly on staff retention metrics; beyond that, she says, the specific KPIs are dependent on the business model. “If you’re a direct-to-consumer brand or an app business, you need to be in the 5-10 million revenue range.” They also look for strong customer satisfaction and referral metrics, asking: “Do people love [the business]? Is there high word of mouth?” In Camilla’s experience, businesses that can answer ‘yes’ to these customer satisfaction questions – while also demonstrating strong retention and reasonable revenue – are proving most likely to successfully raise investment in the current funding landscape. 

Choosing the right time to raise VC funding

The central preoccupation for many platforms may be how to raise venture capital, but it could be even more important to consider the ‘when’. “There are businesses where you want to wait with monetisation until a little bit later on in the journey”, Andrin tells us. “Once you have critical mass in usage, there’s a well-proven playbook for how you’re going to monetise, so it’s much more around usage than it is about revenues. If you’re building a more traditional SaaS company, […] then financial metrics matter a lot more.” Particularly for multi-sided platforms whose business model relies on generating positive network effects, these usage metrics are indicators of when the time is right to scale. “Often, there’s an initial minimal viable market where you can play a dominant role”, he says. “We love businesses where you have an ability to develop a very strong market position in what looks like a niche market initially, and then branch out from there.”

In some cases, however, even product development can be secondary when raising early-stage funding. “We back people very early. Often, they’re just a team; they have an idea but they might not have a fully built product”, Camilla says. “We invest from pre-seed – a really good team with an idea in a market we’re excited about – all the way up to series A, [which is] where you have a few more metrics. Those [Series A investments] are normally businesses we’ve tracked over time. There might’ve been a reason we didn’t initially invest, and then the metrics have come through.”

At Piton Capital, there’s a preference for companies with a slightly longer track record. “We tend not to do pre-product investments”, says Andrin. “We quite like an entrepreneur [who has] worked through some of the initial product questions, maybe figured something out in a small part of the market already. We are less focused on revenue and more on usage, but we typically invest post-product.” Still, the fund invests in early-stage ventures, he adds. “Small for us would probably mean in the hundreds of thousands. Our typical cheque is in the low millions.”

The role of AI in the future of platform investment

Along with the majority of the business and technology sector, investors are carefully watching the arrival of a new generation of AI. This disruption to the status quo reminds Andrin of another revolutionary moment: that of mobile technology in the early 2000s. “Is AI a similar shift? What are the threats and the opportunities to these [established] models from AI?” he asks. Camilla finds it a suitable comparison. “[AI] is very similar to mobile in that it’s an enabler to supercharge platform and marketplace businesses, rather than being a business model in itself.”

That doesn’t mean that AI isn’t exciting to investors, just perhaps not in the way one might expect. Camilla predicts that AI will kickstart a new type of platform ecosystem that fosters entrepreneurship and allows even more people to see their ideas and business concepts become reality. “We think there is going to be a wave of platforms enabled by AI that allow more creativity in the material space”, she says. 

In Andrin’s view, it remains to be seen what consequences AI will have for consumers. “One of the things I’m not clear on yet is to what extent AI will change the demand side of the equation the way mobile has, which basically was a different interface for consumers”, he reflects. “And the other one is: to what extent and where is AI essentially a sustaining technology versus a disruptive one?” The answer to the latter question may depend on the sector, he observes. “The argument is that in some areas it’ll likely favour the incumbents who are sitting on top of data, because the value with AI is clearly going to be more in the data than in the code. And on the flip side, obviously the barrier to starting a business has just been lowered once again, because everybody now can basically build software. I think it’s going to be a very interesting tension between those two concepts.” With AI, Andrin sees significant opportunities in sectors that, to date, have been slow to digitise, such as health, real estate and shipping. In these industries where there isn’t a digital incumbent, he predicts that the next five or ten years will offer a fresh chance for new businesses to succeed.

As to whether AI-focused platforms are more likely to raise investment, Andrin’s position is clear: “Every business will be an AI business”, he thinks. “Understandably, a lot of entrepreneurs are trying to use the AI hype to attract attention from VCs, and to some extent they’re successful in doing so.” That’s not where Andrin’s focus lies, however. “I’m much more interested in how [AI] will actually impact the economy and the businesses that we invest in – not for the next 12 months or for their funding journey, but […] in the next five or 10 years.”

Is AI regulation artificially holding back innovation?

The hype around AI technology has quickly drawn the scrutiny of regulators. Earlier this year, the European Parliament voted in favour of the AI Act, intended to restrict so-called ‘high-risk’ AI. This draft legislation joins that of countries such as Brazil and China, but Andrin is sceptical of whether the regulatory tide will ultimately be for the public good. “One of the real concerns I have is regulatory capture, and frankly, I think it’s very much going the wrong way right now”, he says. “[Regulation like the executive order in the US last week] is just benefiting the incumbents. So I worry that we’re seeing very legitimate concerns about AI safety being hijacked for the purpose of essentially stifling innovation.”

An artificial suppression of innovation thanks to artificial intelligence regulation could already be happening, according to Camilla.“That’s what we’re hearing in the health space, which is heavily regulated. A lot of the innovation has been around AI-enabled tooling, which is less regulated”, she recounts. “We are starting to hear people in pitches [say], ‘There’s a one-year window for us because regulation’s coming, and once it comes, no one’s going to be able to get through the door.’ We find it pretty disconcerting that that’s the mentality that’s starting to happen because of the drive on regulation.”

Joe offers another, more optimistic perspective on AI regulation, however. One of Isomer Capital’s partners has been seconded to the UK Prime Minister’s working group on AI regulation, and Joe says that he’s hearing positive reports of the progress. “[My partner] was saying, ‘Actually, we’re closer to each other in ideology than we thought.’ And that’s a way forward.”

To go further

This panel with Joe Schorge, Camilla Dolan and Andrin Bachmann was part of the Platform Leaders event organised by Launchworks & Co on the 9th of November 2023 at the Science Museum. Attended in person and online by hundreds of experts from all over the world, Platform Leaders provides an opportunity for entrepreneurs, academics, practitioners and policymakers to understand the issues and shape the debate. Stay tuned for more valuable insights from the latest conference, check out the full list of speakers and agenda, as well as videos and articles, and join the community to learn about upcoming events and more.