Having launched his own hedge fund in the early 1990s, founder and CEO of N2 Technology, Derek Watson, is well-versed in raising capital, and yet he was surprised at how difficult it was for start-up founders to raise funds from investors and venture capitalists (VC).
Watson’s hedge fund was doing well until the 2008 financial crash came along, leading him to focus his attention mainly on early stage companies in his portfolio.
After selling his hedge business in 2012, Watson continued to work with start-ups and watching them struggle to secure funding was what led to the idea for N2 Technology, an open-access digital network that uses an algorithm to connect companies raising capital with professional investors.
In an exclusive interview with Arabian Business, Watson discusses the challenges in the start-up funding ecosystem – stressing that these are global issues faced by all founders and investors rather than region-specific – and how N2 helps resolve them.
How did the idea for N2 Technology come about?
During my conversations with start-up founders, the inevitable question of whether I would help them raise capital always came along. My response would always be positive, thinking it would be easy given I’ve been in financial markets all my life and managed to raise $500 million for a hedge fund.
But it is shockingly difficult. It takes so long to get to the right people, and even those can be the ones who can write the cheque but not necessarily be the right fit for the start-up. I’ve been a founder myself, and I’ve spoken to enough founders to realise it’s a real headache.
Could you elaborate on that?
Investors are always telling entrepreneurs to do certain things, such as spending more time qualifying them before reaching out, but there’s not enough hours in the day for someone to do that, when you consider what the numbers look like.
It’s only half a percent of all entrepreneurs who reach out to VCs that get any investment so, from a founder’s point of view, you’ve got to speak to a lot of VCs: if you’ve got to reach out and qualify each one personally, and then try and find a warm introduction and then go for a coffee…there’s not enough hours in the day, because you’re also starting a company.
Derek Watson, founder and CEO of N2 Technology.
On the other hand, investors have such little time to spend with founders because they get inundated with proposals that don’t fit them – founders send them absolutely anything without checking what the criteria are.
So they end up with thousands of decks they’ve got to look through, so of course they can’t respond to all those founders.
This is keeping in mind that a VC’s job is quite difficult when you consider that it’s a job where you’re wrong nine out of ten times so you are waiting for that one big pay-off that pays for everything else that fell over.
While there are many data sites that list investors, they tend to be highly irrelevant, taking founders further down the rabbit hole in terms of who to contact. This is because they’re based on historic data on what investors have funded previously. But it does not mean they want to continue investing in fintech, for example, just because they have done so before – they could have reached their quota for that sector and are looking for other opportunities.
How does N2 solve that problem? What is the market need for it?
We went live in September 2020. We looked at how to use technology to lift that weight at the beginning of the process where investors are getting too much irrelevant deal flow and founders are reaching out without knowing much about the investors – or not having a big enough reach to get out there.
Essentially, we just put two things together: we looked at what you would need as a VC or investor to qualify a deal for the first level. We go over about 500 data points to make a transaction fit to an investor.
N2 Technology is an open-access digital network that uses an algorithm to connect companies raising capital and professional investors.
On the other side, we mirror those questions to the founders, asking them what their transaction and opportunity is. Our algorithm then churns it out and comes back with the number of investors which match that transaction and are relevant to the founder.
What is your business model?
We work with tech-enabled start-ups across the world from seed to series B stages. We’ve taken all success fees and introductory charges out of the equation. Instead, we charge a one-off fee of $799 to introduce founders to the investment professionals they matched with and to notify all those [matched] investors that they are looking to raise capital.
How do you identify investors?
We try and make sure that all the investors on the platform are qualified buyers by having conversations with them – it’s not just second hand data that we scraped from some other websites. The most important question that we ask them is whether they actually have capital to invest into new opportunities.
At the beginning, it was a fight to start building the marketplace, but now we have over 650 qualified investors on the platform. We have investors in Japan, the Nordics, the UK, the MENA region, San Francisco, Canada…we’ve pretty much got investors everywhere.
Did coronavirus impact your business and how did you adapt to?
Yes, it impacted it positively. A lot of this business has been done in quite an old-fashioned way previously where an investor from the UK, for example, would jump on a plane to meet a start-up in the region.
N2 Technology works with tech enabled startups across the world from Seed to Series B stages.
Since Covid prevented travelling, that business model has changed. Investors would only come once they’ve qualified people they want to invest in.
To a degree, it is more efficient and faster and we’ve all sort of remodeled and rebalanced the way we work.
What are your expansion plans?
We will continue carrying on the way we are now, looking at seed to series B funding.
One of the things we will be bringing on in the next couple of months is what we call the start-up and investor scouting. It’s essentially a listing portal on our platform through which start-ups can be tagged if there is a live fundraise.
Investors can use it to have a look at the deals happening on the platform and can have matched ones sent to them by a click of a button. Start-ups can look through a list of investors and if they want to match with them, they pay the money, click a button and match.
We want to show that, from this grand list we’re happy to show you, we can give you a very salient list of qualified start-ups to invest in.
We will also be going more into venture-tech next year, working with e-commerce platforms that have steady forward revenue streams which they can take a loan on, get the money upfront and then pay it back from those revenues. This would be for late stage start-ups that have steady earnings and is a model that is gaining popularity in Europe and the US.
What advice would you give founders seeking funding?
My advice to start-ups all over the world is to make sure you’re investor ready. Make sure that you do all the simple things you can do because you don’t want to start having conversations with investors about things that you could have controlled, but are now creating a red flag.
The second thing is to build a proper fundraising process, stick to it and go through it. It’s hard and long work and if we can help with the early stages of that, that’s what we’re here for.
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