Beyond VC: Fundraising Alternatives for European Startups

After three years of bootstrapping, Guillaume Moubeche, the co-founder of French email software provider Lemlist, announced in February that his startup was looking to raise capital. Over the course of a few weeks, he received two separate offers, respectively for $ 20 million and $ 30 million.

He had no intention of taking either.

“When you look at the [VC] community and the media, they only talk about companies that have raised funds, and there is so much pressure as a founder to accept funds even if you don’t need it, “Moubeche said.” I wanted to send a message that fundraising shouldn’t be the definition of a startup’s success and that you can be successful on your own terms. “

VCs have no shortage of dry powder to deploy, with Europe on track to take venture capital investments to new heights. Saw Q1 2021 a record amount of invested capital, with 17.6 billion euros (roughly $ 21.3 billion) spread over more than 1,900 transactions, according to data from PitchBook. But for many startups, investing in venture capital comes at a cost: control.

When a VC supports a startup, they usually sit on its board, which means they often have a say in how the business is run. This works well when a company has expertise in the industry it is investing in, but this is not always the case, as fear of missing out on the next big step can cause investors to spend money. in areas where they have little or no experience. .

Sometimes the influence of the VC can be more of a hindrance than a help, Moubeche said, as startups are often forced to prioritize short-term growth over long-term profitability in order to secure cycles. monitoring and possibly provide an output for their VC. donors.

In Lemlist’s case, the bootstrap was sufficient – but relying on personal savings and a company’s first sales, without further support, isn’t always an option. What is available for European startups who don’t want to go the VC route?

Income-based funding

Income-based funding has gained ground in recent years for founders who don’t want to raise their own funds. As the name suggests, companies receive capital in exchange for a share of future income.

Similar to any loan, this is a fixed amount and gives no equity, so once paid off there is no more obligation. The main difference is that refunds are directly linked to performance. If the expected income of a startup does not meet expectations, reimbursements decrease. Likewise, if the income is greater than expected, the funding is repaid sooner than expected.

Europe is home to several sources of revenue-based funding, including London Uncapped. Founded in 2019, it provides founders with between £ 10,000 and £ 2million in funding in as little as 24 hours, charging flat fees ranging from 6% to 12%. The company has funded businesses including insurtech start-up Marshmallow and dog food delivery company Butternut Box.

In addition to Uncapped, Berlin-based Uplift1 offers up to € 500,000 in growth capital in less than two weeks. It targets companies headquartered in DACH or in the UK and with a monthly turnover of over € 10,000. Previous clients include pet tech startup Vetevo and fashion brand Buckle & Seam.

Debt at risk

Risk debt may be an option for European startups that have already raised venture capital funds but don’t want to further dilute existing stakes. It is aimed at high-growth scale-ups which have not yet reached profitability but which are already established in their markets.

Unlike a conventional loan from a bank, venture capital debt does not require collateral, but lenders have the right to purchase a small portion of equity at a fixed price over the life of the loan. Venture capital debt is short to medium term in nature and is typically calculated using the amount raised in a company’s last round of equity financing, typically between 25% and 50% of the last round.

Several European commercial banks, including Barclays and Santander, offer subprime loans, as does the European Investment Bank. There are also specialized venture capital funds. One of Europe’s largest providers is Kreos Capital, which since 1998 has committed a total of more than € 2.6 billion to 630 companies in its portfolio, including Delivery Hero and the ride-sharing start-up Gett.

Equity-based crowdfunding

Equity-based crowdfunding is a big business in Europe, particularly in the UK. The idea is to raise small amounts of money from many investors, who then receive a percentage of a company’s equity in return for their funding – usually non-voting common stock, allowing the founders to keep the equity. control of the company.

The main providers in the UK are CrowdCube and Seedrs, where startups can raise a minimum of £ 10,000, with no maximum limit. Other European platforms include FundedByMe in Sweden and Companisto, based in Berlin. Excluding the UK, equity crowdfunding in Europe reached a total value of over $ 278 million in 2018, capping several years of growth, according to Statista.

Image presented by LvNL / Getty Images


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