Starting a company is no easy task. Building an MVP, test it and bring it to the market is highly demanding to say the least. Few people manage to sustain this initial momentum and to not give up after some of the many turmoils that accompany the challenging early stage of startup development. Few founders actually make it to the Growth stage.
A Growth stage is when the business finds itself beyond the working prototype phase, and can show significant user traction and sales.
There are many different paths that a company can take from here. Some prefer to go big and replicate what they have built in a massive scale. Others prefer to focus on making the business profitable and sustainable over time.
The funding needs of a company will be determined by its funders ambition and in particular on where they want to position themselves near term in the scale of growth and profitability.
Most of the financing options highlighted in the previous article concerning the Startup stage
will be also suitable instruments for fueling company’s growth. Likewise, some of the funding modes described in this article might also be applicable to earlier stages of a startup, subject to its particular business model, industry it is in, as well as to the funding organization or platform in question.
We will be talking about and giving examples that apply to impact-driven companies. However, the below highlighted funding options as a whole could be applicable to any other type of startup as well.
Venture Capital (VC)
There is undoubtedly no other player in the startup world that has made as much for the proliferation of highly scalable and disruptive businesses, as the Venture Capitalists (VCs). These are private equity high-risk investors that deploy their capital in businesses with high potential, with the expectation of achieving high returns.
VCs are a fundamental part of the startup ecosystem and are its main driving force.
There are many different types of VCs depending on their size of investment and the stage they invest in, being the range as wide as starting from a Seed stage (raising few hundred thousand Eur), all the way through Series A-B-C-D-E (raising up to several hundred million Eur) in order to get the business ready for a IPO (Initial Public Offering).
access to high amounts of funding
great network of potential partnerships, suppliers and customers
connection to other investors to fuel future growth
tough to negotiate with, which can lead to giving up a lot of equity
loss of independence – it leads to giving in part of the control of the company
draining fundraising process – founders must be ready for a lot of rejection (it might take +100 pitches to get to an YES)
Questions to ask yourself before considering investment from a VC?
Does your impact depend on high amounts of capital?
Is your startup business model highly scalable?
Does your business present high opportunity for growth (10x, 100x)?
Are you okay with giving up part of the control and reporting to professional investors?
Are you ready for an exit (IPO, sale, M&A..) in 5-10 years time?
Few tips for succeeding in fundraising through VCs:
Search for a VC aligned with your values (impact, sustainability, purpose-entrepreneurship focused)
Do your homework – due diligence – research the VC’s portfolio of companies and find out what they look for and value in a startup
Have clear goals and define red lines that you would not cross to get the funding (fundraising cannot be at any cost)
- Bring fundraising time to the minimum – in addition to being very energy draining, doing it when you are ready will also allow you to get better terms
- Networking mode vs Fundraising mode
Be always open to talk to VCs (Networking mode), but do not engage in formal talks (Fundraising mode) until you’re really ready to do so.
Impact has become a very hot topic in the impact sphere in the recent years and this has also influenced the VCs space. New impact specific VCs are emerging, while more and more established VCs are launching their own impact funds, too. Among many others, great examples of impact-specific VCs active in Europe are:
Angel Investment Networks (Syndicates)
In the same way that VCs are a fundamental ingredient of the startup ecosystem, so are too Angel Investors, specially in early stage of development. Angel Investors rarely invest alone and certainly benefit from doing so in a group, when deploying capital to a starting business.
Even though some Angels prefer to go by themselves, there is a growing tendency for these type of investors to come together as a group, forming the so called Angel Syndicates. This is basically a membership group that brings Angel investors together, managing the deal flow, administration and legal tasks that come with it, bringing investment opportunities to everyone who is part of the network. In some cases, they launch their own Angel Funds, which to a greater extent act as VC funds.
Halfway between Angel Investors and Seed VCs, Syndicates play a very important role in the startup funding ecosystem.
more complex and longer administration and legal process
higher fees for investment processing
more formalities and reporting obligations
Impact-driven Angel Syndicates:
Among many others, some examples of Angel Syndicates in Europe with impact focus are:
These are private companies that manage the wealth of a given family or group of families, investing it according to a specific set of values and principles. Even though Family offices have traditionally been more conservative in their investments, as its main goal is wealth preservation, given the low returns in the recent decade of conservative investments (such as value-stocks or the bond market),…
…Family offices have progressively increased the amount of capital deployed in high-risk endeavours (startups and scaleups), primarily by investing through VC funds, but more and more often through direct investments.
As consequence, when it comes to investing in startups, Family Offices are starting to operate in a similar way as VC funds, with the fundamental difference of having a unique source of funds, the High-Net-Worth-Indivududal (HNWI) or Family behind it.
There are plenty of reasons for making the case that family offices will play a very important role in funding impact-driven businesses. Members of wealth-owning families, in addition to preserving it for future generations, want to leave a shining legacy to their future generations, which translates into a better world than the one they lived in.
45% of European family offices currently engage in sustainable investing.
This is expected to keep rising, given the succession taking place year after year, with younger family members taking control of the funds, being themselves more prone to supporting sustainable and impact related ventures.
Venture lending is a type of debt financing designed for early stage, high-growth, venture-backed companies. Most often provided by non-bank lenders, it differs from traditional bank loans, which are usually subjected to a collateral.
Even though venture debt represents still a very small fraction of the funding of startups and scaleups, it is growing in popularity among companies. Being a non-dilutive funding method, there are significant differences in comparison to equity financing.
cheaper source of funding vs equity, which always ends up costing more for a growing company
usually more straightforward than raising equity (since there is no need to negotiate new valuation)
no dilution for founders – involves no loss of control
extends runway, sets company in better condition for future raises
avoids downrounds, which may happen if the company is under pressure to raise money
slows down growth, given the commitment to a repayment schedule (cash that will not be invested in the business)
possible conflict with existing investors, in case of future economic turmoils
exposure to higher risk of bankruptcy, in case repayments cannot be met on time
When can Venture Debt be a good instrument?
Early-stage companies looking to extend their runway in a more affordable and less controlling manner
Startups with proven business model and some traction
Venture-backed companies (usually post-Series A)
Companies with recurring revenue (usually in the range of 2/3+M Eur in ARR), which is continuously growing (with at least 50% growth on an annual basis)
Specially suited for subscription based business models (SAAS, etc.)
Among many other options for impact driven European companies is the European Investment Bank
. The EIB is the lending arm of the EU and one of world’s largest providers of climate finance.
Half-way between Venture Equity and Debt
Convertible notes or bonds are issued to enable a startup to raise capital quickly and less expensively without setting a valuation. This is a loan from an early round private investors (VC or Angel Investors), in exchange usually for a combination of fixed interest rate and a repayment in the form of equity in the event of future equity funding round (usually Series A).
There are two key factors that differentiate convertible debt from an ordinary loan and which make this instrument attractive for investors and borrowers alike: discount and valuation cap. The agreement sets a discount, which will be applied to the valuation set in the future round, benefiting early investors from the convertible round. The valuation cap is the maximum amount, at which the conversion to equity can happen.
quicker and easier to negotiate than an equity round
lower interest rate than purely venture debt
less expensive to process (less administration costs involved)
good bridge-round financing option – it postpones the need to set a valuation
higher risk, since it usually creates both, debt and equity obligations
higher fragility, since if equity conversion round does not happen – depending on the terms – the convertible note might need to be repaid as debt
its clauses – valuation cap and conversion discount – might compromise future equity raises
Hopefully this will come in handy when it comes to deciding which funding path is the right one for you to take when scaling your company.
We will be exploring further in depth each of the described funding methods and highlight valuable examples applicable to companies with impact.