Stuck in the middle: young companies talk about surviving the valley of death

For an entrepreneur, the three most dreaded words in the language are ‘valley of death’, the time when young companies run a negative cash flow, waiting for their new product or service to bring in revenue.

“We are a bit stuck there right now,” said Thorsten Hornung, chief executive of Susteen Technologies, a spin off from Germany’s Fraunhofer Institute, which is working to commercialise clean fuels made from biomass and organic waste.

“European venture capital funds are relatively small and they have a degree of risk adversity about where we are now,” said Hornung. “They’d prefer to back us earlier or later.”

But Hornung cannot hang around forever. “A lot of clean tech companies have already died in our space,” he said, speaking alongside other fledgling companies about the challenge of scaling up in the EU, during a session at the Science|Business Horizon 2020 conference sponsored by Innovate UK. 

It is not easy, agreed Shiva Dustdar, head of the innovation finance advisory unit in the European Investment Bank (EIB). “The post start-ups are facing serious problems in financing themselves in Europe,” she said. 

When deciding whether to commit their cash, investors tend to prefer a proven business model over a risky-sounding research and development project.

All the evidence suggests that there is a different risk appetite between Europe and the US. Many banks and VC firms in Europe have rules which say they cannot fund companies with negative cash flow.  “[Have you] ever heard of a growing company without negative equity?” inquired Micke Paqvalén, chief executive officer of Kiosked, based in Helsinki.

Dustdar sees a leadership role for the EIB here. “We need to help some of the European financial intermediaries to understand how a technology has innovation potential,” she said. “We need to bring more finance to science, and science to financing.”

Faced with rejection from the banks, Hornung finds himself filling out a lot of applications for public funding. “But I don’t have the resources to continue writing these things,” he said.  

Tekes, Finland’s 32-year old innovation agency, takes a different tack. “We’re not expecting or waiting for applications,” said Pekka Soini, director general. “We don’t have calls. Our preferred method is to get a dialogue going with a company. This way we minimise needless work.”

Soini said the best help a national body can give a fledgling company is first a grant and then a loan. “It brings the best success. And funding and expert advice go better together than funding on its own.”

Some of Tekes’ best recent investments have been in Finland’s thriving computer games industry. An early investment was Supercell, now a billion euro company. Its success has, “paid back more than all we’ve spent on gaming in 15 years,” Soini said.

For Paqvalén, who has started, grown and sold-off several companies to US buyers, there is no other agency in the world to match Tekes. His latest venture is in advertising. “Hopefully we’ll find a way to get rid of its annoying aspect,” he said.

However, Paqvalén said his best fundraising experience recently was with the EIB. “We got €15 million from them.” He acknowledged Dustdar, saying, “I have to raise a flag for you guys. You have tech, legal and financial competence in one room. From first meeting to closing it took six weeks. For anyone who knows fundraising, that’s pretty good.”