How We Raised a $4.5M Seed Round

My co-founder Eric Landau and I recently closed a $4.5M seed round for our company Encord, focused on building software to automate data annotation for computer vision, led by CRV and including the Y Combinator Continuity Fund, WndrCo, Crane Venture Partners, and the Harvard Management Company.

I have never been a skilful storyteller, fairy tales being my least preferred form of prose. This may come as a surprise since I am Danish and one of the most famous writers to come out of Denmark is Hans Christian Andersen of Little Mermaid fame. However, many composers of fairy tales are venture capital investors, and I am a tech founder. I knew I would have to up the ante as my co-founder and I embarked on our maiden fundraising journey during the depths of England’s third national lockdown. Our seed fundraise marked the culmination of more than a year of uncertainty, hard work, and an infinite amount of hustle; I had to make sure our story inspired the master storytellers who heard our pitch.

Not my strong suit…

Blinded by Venture Dollars

We first started thinking about raising money not long after we decided to start our company. Blinded by what seemed to be a constant stream of enormous venture financings in the early days of 2020 — back when COVID-19 press coverage was still almost exclusively concentrated on the Wuhan lockdown — we thought we’d have an easy time convincing investors to give us money to get our startup off the ground. Then COVID hit, which at the time seemed to mark the beginning of the end of free-flowing venture dollars.

Knowing that we’d fail to gain any traction with investors preoccupied with ensuring that their portfolio companies had sufficient liquidity, we were forced to rethink our fundraising plans. With the wisdom of hindsight, it is clear that we would have failed in any environment. Pre-revenue seed financings are becoming increasingly scarce — two-thirds of companies closing a seed round in 2019 were generating revenue, up from just 9% in 2010.

We hypothesised that the collapse in venture funding would be transitory, and that if we could make it ‘over the hump’ we’d be in a good spot, as fewer startups would be raising money by virtue of not having made it through the pandemic. Whether or not that turned out to be true is anyone’s guess, but it was the best thing that could have happened to us. Instead of wasting hours on end crafting pitch decks, cold emailing investors, and theorising about product-market fit, we started building a business. Fast forward a couple of months, we were fortunate enough to be accepted into Y Combinator’s W21 batch.

COVID-19 slashed the number of VC rounds in the U.S. by 44 percent

The Art of the Pitch

My co-founder Eric Landau chronicled our YC experience in the heat of battle, so I won’t dive into that here. Instead, I’ll focus on our fundraising experience which took place around the W21 Demo Day. Investors started reaching out to us as soon as we had publicly launched on the YC company directory, and we had to try hard to resist and fend off the very creative ways angels and funds tried to get us to pitch them (indeed, for that brief period of time it felt like the tables were turned in our favour). We knew that we had to master our pitch first, utilizing tools like a portfolio visualizer to strategically present our projected growth and market capture potential to investors.

Going to back to my fairy tale analogy, I want to dwell a bit on what a pitch really is, and what might constitute a good one: From first principles, a pitch is a story about the future. We told a story about how Encord would become a multi-$billion company. Things like traction, product, and a well-defined vision are all reflections of how we might come to realise that story. The better the evidence, the better the story — or, when you are a seed stage startup, most likely a fairy tale — tends to be.

After months of obsessing about growth and product-market fit, we had made substantial progress on our key metric (monthly recurring revenue, or MRR for short) and, with the help of our YC group partners, felt like we had a story to match Jack and the Beanstalk. If you are reading this as an investor and have ever wondered what it’s like being on the receiving side of demo day, here is an example of what my inbox looked like 5 minutes after our pitch:

I had never received 77 emails in any 5-minute period in my life prior to Demo Day

Our First Fundraising Lessons

Being a London-based startup, we had the good fortune of having access to both the US and European venture ecosystems. Pitches were done in random order across the two, and we pitched to more investors from the US than Europe. Here’s how we did:

• We were introduced to about 145 investors (angels, angel funds, and other funds of various sizes) through Y Combinator, personal networks, and other inbound
• We met with 52 investors over a total of 70+ meetings
• 18 of those investors were European; 34 were American
• Americans liked us more — our ‘yes’-rate from American investors was almost double that of European investors
• The ‘ghosting’ rate was about equal — a little over half of both Americans and Europeans didn’t say ‘yes’ or ‘no’
• Getting to the second meeting increased our chances of a yes by 60% compared to our baseline
• On average, a European ‘yes’ required 1 additional meeting compared to a US ‘yes’

A few things stood out to us as we were compiling these statistics. The first is the startling disparity between our success rate with US compared to European investors. The second is the lack of committed decisions — just a little over half of the investors we spent time with even bothered to get back to us (writing this made me do a few searches on ‘VC ghosting’, and I stumbled on a a thread worth a read on Hacker News). When a reply is the low bar an investor has to meet, helpful feedback stands out. We would recommend the few investors who shared detailed comments with us to any founder, even though they said ‘no’ to us.

Zooming in on our US/Europe success rate, a number of factors might explain the disparity: Y Combinator is better known in the US; more of the US investor leads came from inbound rather than outbound; we ourselves were biased in prioritising a speedier process and ‘doing a better job’ with US investors because we knew they could write larger checks; and/or the sample size is too small to infer anything at all.

Competition versus Big Markets

It is also worth touching on the types of conversations we had with investors from both sides of the pond. These are generalisations, of course, but nonetheless patterns that we recognised. Broadly speaking, US investors cared more about product, go-to-market strategy, and the absolute size of whatever market you are targeting. European investors cared more about the competitive landscape, and differentiation.

I personally think that the European obsession with competition and differentiation is why our ‘yes’-rate from the Americans was higher. They generally agreed that the market for AI training data creation and management — still an emerging and unsophisticated software stack— is going to be massive and thus produce multiple big exits over the next 5–10 years. Jotting down these reflections, I can’t help but think about Peter Thiel’s observations on competitive markets (from Zero to One):

Suppose you want to start a restaurant that serves British food in Palo Alto. “No one else is doing it,” you might reason. “We’ll own the entire market.” But that’s only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well.

…If you lose sight of competitive reality and focus on trivial differentiating factors your business is unlikely to survive.

Perhaps that’s why the European venture ecosystem is lagging the American. One can only guess.

Investor Considerations

We realise that many founders, particularly from underrepresented or disadvantaged backgrounds, do not necessarily have a choice between investors. But if you do, you might find inspiration in some of the things that helped us narrow in on the investors that not only understood our space, but also could help us become a multi-$billion company. Seeing that we are still early, we only have sparse evidence of whether they work or not. They are:

• If you are fortunate to get a term sheet, don’t only do the reference checks with people they introduce you to — do reference checks with founders who had less successful outcomes
• Don’t underestimate how an investor makes you feel — if they are dismissive, talk a lot, interrupt you, or are distracted, there is a good chance they’ll do that during board meetings too
• Investors are buying a piece of your company — it’s an irreversible marriage you can’t get a divorce from
• Don’t be afraid to ask investors about their investment thesis and what they think of your space — the best pitches feel like a conversation, and what they think your business should be might be fundamentally misaligned with what you have in mind
• A venture firm, particularly a newer one, can be less known, but the partner an ideal advisor — conversely, a firm might be a good fit, but the partner not

Good luck and godspeed!