Financing is one of the most challenging and worry-inducing aspects of starting a company. It’s no wonder, when 60% of companies that raise a Pre-Series A venture round fail to make it to a Series A or beyond. Fundraising is not an easy process, even for second or third-time founders, but experience can help avoid common pitfalls and illuminate opportunity. I sat down with serial founders Avi Meir of TravelPerk and Godard Abel of G2 to hear about their fundraising journeys, and here’s what I learned.
According to Avi, there are two approaches to startup financing. The first is led by business need, where the company’s use of funds is the most critical component. The second approach is led by the market, where founders raise capital when the market conditions are best rather than when the company needs it. For Avi, the second approach allows for more flexibility. Investor conversations occur naturally based on business movement, and funding flows from those conversations. While this relaxed approach allows for more focus on the business, it may be less available to first-time founders who do not yet have a strong track record, Godard points out. For him, bootstrapping was necessary to get his first business through the dotcom crash. “It was really painful, but ultimately it forced us to focus on the business and made us better entrepreneurs,” he says.
Whether you adopt a business-led, market-led or self-funded approach, maintaining focus on business objectives will strengthen your company and open doors to financing options.
At the core of fundraising, good partners can help demystify the investment process and facilitate the right connections. Venture capital investment can be a tricky game. Similar to dating, it requires a delicate show of mutual interest with the ultimate goal of long-term partnership. “Given it’s rare to get a clear “no” from investors, the key for first-time founders is to discern the signals that indicate true interest,” says Avi. “You know it’s a warm lead if they can’t stop contacting you, asking questions and wanting to meet.”
From understanding signals to signing term sheets, tapping into Angel investors and other founders can give startups a big leg up. Other founders can help cut through the noise with institutional investors via warm introductions, while experienced Angels can help diffuse complex term sheets across venture capital and alternative financing. “Bringing on an Angel investor prior to institutional investors can help first-time founders tremendously,” said Godard.
Using a broader set of financial tools allows startups to pursue their goals with maximum precision. Where equity is often used for growth, revenue-based financing or credit lines can also be used for working capital. Using these alternative forms of financing can be more straightforward and cheaper than equity-based tools. For example, startups can leverage non-dilutive financing for projects or growth-led activities that generate immediate revenue, which “is a very standard process, and as close to free money as you can get,” says Avi.
Combining tools like revenue-based financing and venture capital investment to reach across the breadth of your company’s objectives is becoming industry-standard practice, as startups augment venture rounds with 20-30% alternative financing. Just this year, European startups have raised more than €8.3bn in non-dilutive capital, more than 5x than was raised in 2016.
Many first time founders see equity-based fundraising as the be-all and end-all of venture financing, but this is another area where founders learn from experience. “Diversifying capital structure with something other than equity is a great way to enhance it. For every round of financing we do, we always grow our debt lines,” says Godard. This approach protects the equity interests of both founders and their investors - 55% of VCs are either advocates of alternative financing or have invested in companies that are already using it. Ultimately, alternative financing allows for more exacting financial management, which helps founders retain control, raise more money, and grow their business faster.