After a record year for fundraising in 2021, French startups have continued their momentum with more than 1.7 billion euros raised since the start of 2022. However, this method of financing does not lend itself not in all situations. And sometimes the choice between lifting and backing arises, a choice that must be made according to several parameters…
To support their development, it is common for startups to raise funds. Behind this operation, there is above all the need to finance an identified development project, included in the business plan in connection with the product/marketing/sales/HR/etc. roadmaps, and which will make it possible to accelerate growth. However, in some cases, the funds raised may be insufficient. The question then arises of proceeding either to a new fundraiser or to back up with another company.
Several points should be monitored in order to choose the option that best suits the startup’s situation.
Fundraising: yes if it is to finance a project included in the business plan
In the case where the startup is on its way and where the funds come to finance a new tranche of projects to complete and further accelerate the implementation of the business plan, a 2nd or 3rd fundraising is interesting to carry out. This is what has driven the fundraising made by startups that have become unicorns such as EcoVadis, Spendesk, Lydia, ContentSquare, Qonto, Ankorscore, and Exotic.
It can just as well be discussed with new investors or with shareholders who have already entered during previous rounds of funding, as Shippeo did at the end of October. The manager must, in this second scenario, remain vigilant so as not to see himself too diluted following the operation.
If, on the other hand, the need for capital comes from structural or cyclical difficulties, raising funds is not the right direction. An investor or a shareholder, in particular during 2nd or 3rd rounds, will expect even more a significant return on investment. And its demands will be even higher if previous promises have not been kept.
Additional pressure will therefore weigh on the team not only to raise the bar but also to satisfy the shareholders. On the other hand, the team might get demoralized if they have to deal with any more challenges or obstacles on top of the ones they’ve already encountered.
Backing: to give a second impetus to the startup
In this case, what to do? The first option often studied is to back the startup with another company. To assess its relevance, it is essential to assess the value of the said startup. It is measured on the basis of its strategic, tangible, and intangible assets (eg intellectual property).
These assets, even if not yet valued, are recognized because they are both potential sources of income and levers for relaunching or accelerating growth. This is for example what led Warmango to join the Belgian group Van Marke in April 2022, or even Liberkeys which did so with Crédit Mutuel Arkea in June 2022.
If the value of the startup justifies backing, it is important for the startupper to be prepared in more ways than one. First, from a “method” point of view to present a solid file attesting to a situation under control and to prepare for the negotiation, the terms of which vis-à-vis the startup can be very critical.
Then, from a business point of view because the backing can bring out new projects that the startupper had not identified and that it is important to promote to the company. Finally from a personal point of view, joining forces is often experienced by the founder as a failure and a highlighting of his flaws as a business leader.
And if neither fits the startup situation
If, conversely, the value of the strategic assets – and therefore of the startup – is low, backing will not be interesting. It will be difficult to obtain a fair price during the transfer. In this case, it is more appropriate to review the operational structure of the startup so that it is able to deliver part of the promise while replenishing its cash and strengthening its equity.
Among the possible avenues: work on an indisputable value proposition, a precise and operational 3-year plan, development of additional sources of income, a plan to secure “key people”, etc.
The choice between fundraising and backing is therefore not so easy to make. There is a real diagnosis to be carried out beforehand on the activity, the execution of the business plan, and the growth potential of the startup.
Due to the complexity of the operation, the current context of uncertainty, and the dose of emotion that arises when a business project does not go as planned, it is important to rely on professionals who have already managed this type of operation as startup bosses and will be able to co-manage the startup with its founder to ensure and secure their growth challenges.
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