Season 10 - The second round of fundraising

Episode 4 - March-June 2022 - Is the hardest part done? We’ve never been less sure

Adrien Aumont — Now that we have a financier for our trains, we feel we’ve come a long way, and have overcome the most difficult obstacle of this part of our adventure. After all, the acquisition of these trains is the biggest part of what we need. Since the start of the project, we’ve designed things to be asset light, so that means not adding the purchase of trains to our economic balance sheet. Renting from a ROSCO (which owns the trains) is a great success in our eyes.

What remains to be financed – the operational side – falls within the domain of venture capital funds and the VCs we have spoken about previously in this newsletter. Those with a good memory know that we struggled to convince VCs to invest in Midnight Trains during our seed fundraising round. But now that the trains are funded, there's no reason they can't get involved. We’re therefore adjusting our new fundraising for this type of investor and taking into account the needs of the company and the guarantees required by ROSCO. Then, we decided to divide it into two parts (series A and series B is the official jargon). The first will make it possible to pay the guarantees required by ROSCO, as well as financing the company during the two years of train construction. During these two years, we’ll do another round of discussions to properly launch the line and cover the build that will lead to its profitability.

Romain Payet — To find the VCs needed, we start with our first list and expand it until it contains around fifty names. We know that it’s a difficult product to finance, that we’re far from the basics of venture capital. So we come to the conclusion that it’s better to go wide. Among these fifty names, we contact around thirty-five via personal connections, most of which are through our current shareholders. It’s important to understand that VCs receive a huge amount of cases – sometimes more than a thousand per year. An initial sorting therefore takes place like this, when a trusted third party acts as a connector.

This enables us to arrange around twenty meetings which always follow the same format: around thirty minutes, by video, with an in-house analyst who has reviewed our presentation deck and who goes on to challenge a few points. Generally, if the analyst likes the project, they present it to the investment committee which meets weekly and reviews all the cases presented over the last seven days. If they’re interested, and think it’s worth exploring, the analyst sets up a new meeting for about an hour, sometimes face-to-face. During this, they present the questions from the other members of the committee in order to move forward. The meeting isn’t intended to be conclusive. It supports its model and leads to the production of new documents to answer the investment fund’s questions. The latter generally precipitates an expert’s involvement to check the validity of the claims, and that nothing important has been forgotten, etc. Bit by bit, the file grows, metaphorically and physically, before going to the investment committee again. And this time, it becomes conclusive. This final review generates a letter of interest, a term sheet, which specifies the amount that the fund could invest, the governance conditions it requires, as well as a deadline of a few months, during which all the elements get checked.

Adrien Aumont — So much for the theory. In our case, things didn't quite go smoothly. First, we mainly dealt with junior analysts, which is totally normal, but isn’t easy when presenting a project as complex as ours. Even if analysts’ curiosity earned us many meetings, we soon realised that there was no railway expertise or travel expertise available within the team. So we spent our first meetings teaching them the basics, explaining the sector and how it works. It’s annoying, because it holds us back from selling our strengths and the qualities which makes our project meaningful. When these junior analysts have to defend our project before their investment committee, they’re like rabbits in headlights.

Nicolas Bargeles — Often, we’re asked to answer surprising questions. For example, if we’re going to ride on the same rails as the SNCF, or on our own, and if they will really let us do it... In a situation like this, where we have to explain the basics of rail, it means postponing discussions on the specifics and added value of our project. So it feels like it will be difficult to gain assurance with any kind of speed.

Romain Payet — In their defence, it’s normal for VCs not to know every sector perfectly. They invest in projects ranging from Midnight Trains to fintech and start-ups of all kinds. Usually, they build an understanding of trending areas like blockchain, artificial intelligence, home food delivery, last mile mobility or others. In our case, there’s no precedent and they won’t have a new railway project for a long time.

What’s more, as we explained during the seed round, we don’t get into their investment thesis. We’re not just a tech company – we’re also somewhere between infrastructure and industry. This implies that, although we can generate a lot of income, we have a lot of requirements upfront. Furthermore, while waiting for our trains, we can’t iterate the model, which they’re used to doing. They invest, iterate, adjust, iterate, reinvest and so on. Then, they go out to generate their added value. Again, it doesn't add up. If they enter Midnight's capital, they will have to exit later and with increased risk, which won’t work for them.

Nicolas Bargelès — There are also guarantees requested by the ROSCO… Indeed, part of the money will be used to build a team, create an information system, communicate our brand, etc. It’s constructive and concrete, unlike the other part of the money we need for guarantees. It’s tied up in an escrow account and so won’t work either. This is unusual and even counter-intuitive for them. This proves to be a difficult point for the VCs to accept.

Romain Payet — The VCs respond saying that they love the project, and that they will be our first clients, but that they can’t invest, as it doesn’t correspond enough with what they do on such and such a point. This is where we probably made a mistake, believing that despite our previous experience with them, they were going to look at the project differently once the trains were financed. It’s a real blow, but another financing plan suddenly opens up to us, from one of our shareholders.

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