An in-depth look at the path to funding a travel startupNewsBy Linda Fox | December 18, 2013Share This article was originally published on Funding a travel startup can be hard - from finding the right person in the right investment house, preparation and working out a pitching strategy.With more than $150 million of startup funding experience under his belt in previous as well as his existing business, Aaron Gowell could be described as something of an expert.Silverrail Technologies, the B2B rail specialist, started off with more than $9 million at launch in July 2010 and successfully completed rounds of $5 million in April 2011 and $15 million in Series B in March 2012.Now, as the company evaluates going for a third round of funding - how much is just one of the questions Tnooz put to Gowell, as its founder and chief executive.In the following Q&A, he shares some of the basics of funding, tips of the trade and what he has learnt along the way.How do you work out how much to go for?It depends on the stage of the business, it's about how VCs and start-ups think about the different stages of capital. Between my last two businesses I have raised about $150m in VC money.With Silverrail we have raised about $30m so far and gone through series A and series B.Series A is a company's first institutional money, after seed funding or friends, founders and family. It is about saying, “we are at a point where investors money will help us prove out the concept" and presenting the huge opportunity the startup up represents and how it thinks it can disrupt the status quo or create a new market.It’s very much about proving out and tends to be pretty low risk bets - $1m to $3m – with investors thinking, "I like this team and I want to place a bet."Series A tends to be much more about the team, smart guys, who need enough to run for 18 to 24 months, payroll for 10 people for two years, office and overheads, marketing.Series B is when you have a product, you have proven it out and all signs show it is heading in the right direction. Now you need money to really prove it out. It could be for marketing or a new product. It’s about putting gas on the fire, about speeding things up.Series C is when the product or service is clearly working, there is revenue coming in and the startup might even be profitable. This is when investors want to hear that you have a couple of interesting ideas to pursue. And, it tends to be big sums so investors will want to see the startup is doing well.Apart from the sums involved, how does each stage differ?There is a very different dynamic for each of these different stages.Our core business is working well and being adopted across the industry. Now, we have some other ideas about products and about tackling new markets, that are slightly different to the first core plan.There are different kinds of firms for different stages.Some firms specialise in early stage funding. Every firm reserves double the amount you are raising, e.g. they give you $5m and set another $5m aside. This is not guaranteed to the startup, it's just in case the fund wants to invest more.At Silverrail's stage the next round is likely to range from $35 million to $45 million. At each stage you about double. Series C tend to have a certain profile about them. The right kind of fund for us right now would be a growth fund.A typical scenario for raising $30 million in Series C might be - I make the argument on how we’re going to make that money and what we’re going to use it for.There might be five different initiatives you have been thinking about for the past 12 months and each has a range of numbers on it. Let’s say one was a mobile application (that’s one we’re thinking of), it’s outside the core plan and we have thought through that cost. Another might be that some customers have asked us to create a white label of our service, that’s not something we do today.The way a Series C investor wants to look at things is “what does my money buy?” so I might say we’re going to build a consumer brand. You also do not want to have to go back for more funding too quickly.What's important in preparing to seek funding?I think fundraising is exactly like dating.A lot has been written on how to go about it, almost all is aimed at the story and the pitch and I think startups devote 90% of their energy on the story and pitch and not about the right partner.Getting the story exactly right and trying to create the perfect pitch is useless if it falls onto the wrong ears – it's about the fit, the chemistry, the right impressions. I think companies don’t spend enough time finding the right company.For Series A for my first business I pitched 37 times and was declined 34 times. I just did not understand how to find the right firms, most young entrepreneurs will have an idea and only think about getting the money and getting the company rolling. They take every meeting, every introduction they can get, hoping something will stick.What you start to realise is that there is a formula and the first step is targeting firms interested in the thing you do.E.g I have a B2B technology company so let me pitch to travel investment companies who might have invested in Kayak or Airbnb but understand less about my business than companies that have done less in travel. Expertise is more important than industry. As soon as startups say we have a mobile play or a B2B play, they need to research the companies that specialise in those areas.Once you have done that it’s about finding the right partner within a firm. There’s a bit of a formula that tends to work here.Cheque book + hunger + bandwidth = success.You have to get someone who has cheque writing authority. Startups spend time with associates that can’t say yes or no to a deal. A lot of the time a start up will find the right firm and will head for the most senior partner but you have to find one who is still hungry and wants to be doing deals. That senior guy is rich, old and tired so it tends to be younger guys who will work harder on your project.If you have found the right guy but you see he is on seven boards already, he will listen to your story but have no time, you need people who are looking for new investments.If I had understood this dynamic I probably could have cut those pitches down to 15.How do you prepare the company internally? You want to be as transparent as you can outside your business and with your team. I have spent a bit of time talking to the team in terms of our progress, how much is in the bank and what we would use the money for.How do you explain Silverrail in a nutshell to investors?B2B tends to be fairly complicated because you don’t have a website to say this is what we have built. It’s more about solving a big problem.There are certain phrases and words investors are looking for so tailor the language e.g, "the rail market is a massive sector that is going through huge change." They hear big market, they hear chaos or transformation which always equals opportunities.What they never want to see is "I’m in a big market but am going up against two other companies that have 70% of the market."The world of high-speed rail has been systematically decimating air travel and that is happening all over the world. Where we talk about the consumer dynamic of people changing their behaviour, VCs might not understand rail but these are words and phrases which could apply to any industry.People don’t buy rail online and Silverrail makes buying rail online as easy as buying air and that is something VCs can fit into their minds.There is a balance between showing off your tech product capabilities and confusing people because that means risk. Now, I start off keeping it super high level because I just want to show them a couple of slides. A lot of start-ups throw up too much too quickly.Did you under-estimate the challenges of raising funds? My last business was not a pure startup, I started by buying a business and turning it into a bigger company but when you are a true Series A, it is a pretty confusing landscape. Unless you have gone through it before, it is fairly daunting.With the 37 pitches, I just did not know any better. I knew I had a good idea but it took me a long time to get the story clear and bite-sized.You have no idea the first time how people are going to react and I would get blindsided about the things people wanted to talk about. Now I start with very low risk firms.You should never go to the guy you really want to say yes first. You want to practice because if you blow it you’re going to be deflated and you’re going to sit on the couch and drink. Go for someone who you would not care so much if they say no, then get a little better each time and then take it to the guys you really want to say yes.Are some places easier to get funding and why?When we did Series B, most of the rail we were doing was in Europe, which is $80 billion rail market. In the US it’s a $2 billion.I thought we needed to have a European lead investor, I was adamant and was certain it would be a British company. I could not get one VC to engage with the idea but was inundated with US and in particular the West Coast.British investors, generally speaking, tend to be much more conservative. Taking risk in the European market is different to the US market, if you lose people’s money, it’s a really big deal so in Europe investors are much more cautious. I could have got the British guys there but they were so careful, methodical and slow. I was a little disappointed.In the US, even if the partner is going to pass up the opportunity, he/she still says they appreciate you showing it, in London, it’s a very different dynamic.I had three term sheets (rough terms of investment) on the table before I could even get one British fund interested. I was scratching my head, did they not like me? It should have been a European deal but only one British firm replied.Right now, I’m very interested in European firms but I’m on the East coast of the US which means the firms of New York and Boston will like the idea of a high-growth startup in their backyards and I'm also talking to the West coast because they tend to move quickly so it's highly likely that's where the money will come from.I think the European market is going to miss out on opportunities.Is getting a small amount as hard as getting a larger sum?It’s harder to get a small amount of money than bigger. With the firms that make early stage investment, the fund size tends to be small so they have less opportunity and tend to be careful about where they place their bets.Silverrail's Series A was led by an $80 million fund and Series B was led by a $600m fund.The other dynamic is that as a startup you are highly unproven and if it’s really just an idea, that’s hard to pitch. I had an investor say “I like your business because I can see where this is going what I’m not good at is seeing around corners the way a series A investor is.”What happens to 'business as usual' during the process, do people get dragged off their day jobs?You try to keep the company sticking to its knitting as much as possible.My co-founder and head of product strategy, Will Phillipson, is the visionary so he needs to be in the room for any big pitch. It's about how much time you spend fundraising versus paying attention to your business, it’s difficult to do both well.For me to pull Will off the business is more problematic so we try to minimise and plan things out as much. You don’t want the process to be too open ended so we try and think through the phases and use people’s time well.Does it get easier after the first time?The process is a little easier but the kind of people who were the right investors for my Series B are very different to the kind of people I need for my Series C so I have to learn how these big firms will write big cheques so that’s the piece I’m trying to learn now, how does the story resonate, find out what really works here.The only thing that’s easier is that because the business is making good progress I can point to concrete things that have been accomplished so the confidence level is higher.Do you think it requires a certain kind of personality to do?I do, although I wonder at 45 why I keep doing these startups but this is what I’m good at. I’m good at helping think through what really matters and what does not. I find myself deliberately, unconsciously putting myself into things that are a bit hard to do. I've started to realise it’s in my nature.If there are attributes, it's someone who has a vision for an idea and can bring other people onto that idea.You also have to be able to recruit talent, that’s a really big component and you have to be okay about dealing with ambiguity because you never know how it is going to turn out, what is the worst case scenario.How many people should be involved in the process?It depends on the stage. You want to make sure investors are seeing a number of really experienced people who are on the team especially in the early stages.VCs don’t know about the space and don’t know if it’s going to work but they'll be thinking, "I bet if these guys get into a jam they will find their way out." The smarter the team, the better they will find a way out so you want to show them off but you do have to be careful how much time you devote.How long do investors take to respond?I have definitely found over time that people tend to have immediate reactions. So, if they like your idea they want to respond and keep the dialogue going, then you are in really good shape if you pitch. If your email does not get a reply then you have a problem because you’re going to get a reply that day if they’re interested. First impressions really count, if an investor likes the idea, he wants to learn more.How important is press coverage in the process?I have a piece of paper with all the components of my fundraising plan and one of them is about warming up the market.You don’t want the first conversation to be “I’m raising money.” Now, we want it to be "I’m raising Series C. I see you have invested in the past".I have a list of 15 firms, which I've created over the course of 18 months, that I think would be good. Every time I saw a funding story I wrote it down, then I reach out at some point do the introduction and say let’s get to know each other.I started doing that last Spring/early Summer 2013 saying that I might be doing something in the Fall. We are thinking about it because we have big ideas so you have the initial conversation and now we’re on their radar.We make sure any PR goes to those people on the shortlist - we added this thing or did this deal - that way they have seen you in the press four/five times and they are warmed up. It's about getting to know each other in a very low-risk way.NB: Path in the sky image via Shutterstock.