Upscale 5.0 - Finance & Fundraising

This session will explore Finance and Fundraising as you scale, including planning and raising your Series B, alternative finance options, the investor perspective on further funding rounds and the founder experience. It will also look into key elements to consider when deciding whether to take debt alongside equity, working with and selecting the right VC, getting your books in order ahead of exit and any other financial pitfalls to consider.

Scale Coaches:

• Aaron Archer - Partner, Cooley
• Andrew Parker - Director, SVB
• Ben Harris - CEO, Decibel Insight
• Mandeep Singh - Co-founder, Trouva
• Ryan Naftulin - Partner, Cooley
• Suranga Chandratillake - General Partner, Balderton

Session Takeaways:

• Explore the alternative financial opportunities and options ahead of your company as you scale.
• Understand key considerations, best practice and strategies for raising your Series B.
• How COVID-19 is affecting fundraising and strategies to mitigate 
• Hear the experience of founders who have secured various types of fundraising. 
• Understand peer challenges and approaches that you can tailor to your own situation.

> SESSION NOTES

ALTERNATIVE FUNDING OPTIONS with Andrew Parker, SVB

Debt financing

3 key elements of debt financing

• Structure
• Collateral
• Price

The less structure and less collateral that you provide means that the financing solution is much more flexible in terms of what you can use it for, what you do with it and how you shape your business. However as it gives you the most flexibility and represents the most risk to a lender, it therefore comes at the higher end of the price scale as your business starts to develop and moves through Series B, C, D.

No structure and no collateral = High price

Some structure and/or collateral = Mid price

High structure or collateral = Low price

Uses of venture debt

Extend cash runway to the next equity round

• Want to push the cash out day further away, 
• Enhance enterprise value at next round stage
• Continue on same trajectory
• You increase top tine  further than

Acts as an insurance policy

• Give yourself a buffer on the next equity raise
• Travel on same trajectory without slowing down

Double down

• Keep cash out date the same but with increased level of top line growth
• Where to deploy money (as it is the most flexible form of finance)
• Where you see fit, 4 most common areas:
  • Engineering / product development
  • Sales & Marketing - customer acquisition
  • Geographic expansion
• Capex & Hardware

Build a bridge of profitability 

• When you don’t want to continue going on to raise further rounds

Key terms

Types of facility

• Usually amortized over a period of 3 - 4 years
• Typically covers all assets of the business, including IP

Amount

• As a very rough rule of thumb, expect to put in place a facility that is around 25 to 30% of an equity round
• While 25 to 30% is a good rule of thumb, that clearly means different things to different businesses in terms of a cash out date depending on the burn

Cost

• An upfront fee is paid to arrange the facility, typically 1-2%
• Can reduce interest rate (7-12%) if the business is willing to pay a back end fee
• Warrant coverage - what does that mean for the diluted ownership you are giving away? Don’t be afraid to ask lender about this

Covenants

• Venture debt does not have financial covenants
• Debt is significantly less dilutive that pure equity

The key is to use debt wisely

• Ensure that a company doesn’t over-leverage themselves with debt as ultimately it is a debt that needs to be repaid over time
• Should not be used when companies have short cash runway (< 6 months)
• The amount of debt a business takes on should not be off putting to future, internal or external investors
• What is the typical valuation expected to be, and round size for equity raise? 
• What is the outstanding amount of debt and is it 25-30%? 
• Does the debt appear to look really outsized compared to that next equity round? This should be avoided to not put off the current internal and external future investors.

What to watch out for

• As mentioned, venture debt should be free of covenants
• The security package provided should normally be a full charge over all business assets including IP
• Pay all future unearned interest that lender would have accrued 
• Some lenders will offer to reprice warrants - try to avoid that where possible
• Use a lawyer that is very familiar with venture debt products - lawyers that have experience of working on multiple venture debt transactions will get you a much better deal

FUNDRAISING STRATEGIES

with Aaron Archer & Ryan Naftulin, Cooley

When it comes to venture debt, picking the right partner matters.

Look at what venture debt providers do when times get tough; are they looking at their existing portfolio of ongoing relationships as opposed to a bunch of one off disconnected events? It is advised to not optimise around cost when picking a vendor, instead pick who stays with the business in tough times. That will ultimately matter more than making some modest savings when it comes to Series B.

After having raised Series A and when looking to raise Series B, it’s important to find investors that understand the stage the company is at, and if they fundamentally put capital towards other companies at a similar stage. They’re taking into account the current environment and if the business is able to scale in it to reach the next important milestone for value inflection on the capital being raised now. It’s important to think about existing investors' appetite - how do they feel about their portfolio and are they eager to fund your business beyond this round?

Strategically, it’s not always about you, it's more about them. Are they a fund that is running out of their current fund and going to have trouble raising a new fund and worried about their existing portfolio, such that they're actually more focused on you not running out of money and hoping somebody else funds it? How does that compare to right now and if they're feeling pretty good about you and yours, and the rest of their portfolio.

Are your Series A investors and new investors aligned?

When thinking about a partner, think about whether your Series A investors, your new investors and the management team are aligned around what they're trying to achieve. It's particularly important as thinking about bringing in European investors, American investors, or others. This is because sometimes founders, or management teams are in a position where they'd say they really want to just get the business to 50 or 100 million and sell it to another company. Although not a bad business proposition, it will certainly change who is going to be interested. The larger American funds would like to see the opportunity to invest in a B, followed by a C, maybe followed by a D whereas medium sized firms in Europe, might say, well, if we can get three or four acts in 24 to 36 months that's more appealing.

When thinking about who to approach, consider:

• What your upcoming milestones are and what funds are interested in taking you to those milestones
• What their appetite for liquidity is in a medium - long period of time
• The impact of COVID on those things and how your runway can be affected

Series B or A1?

It’s just a letter - think hard about what the right round and signals are for you and your business.

Is it more an extension of your prior round or is it a proper Series B?

The future fund is in between, better than extending the prior round but would need more time for a massive value inflection point.

THE INVESTOR PERSPECTIVE

with Suranga Chandratillake, Balderton

Series A vs Series B

Series A - all about the product market fit

Series B - focus on the scaling engine - product market fit has been proven but need to prove the ‘engine’ which is a mixture of process, infrastructure and people 

Scaling the engine

1. Clear repeatable proof that you are scaling your business

E.g. if you are acquiring users, demonstrate there is a clear, automatic way in which that occurs

If you can’t draw a diagram that shows how 90% of your company works as a fairly simple flowchart, it’s not fine for series B

     2. Fluency around that model/engine

Know your metrics and why are they relevant to you

If there are weird things about the metrics, you know why

Need organised, regular systems

A team that is well engineered and can run the business for the next few years, a team that is built out rather than a team that still needs building, Investors are not looking for team risk.

Fundraising in the current environment 

1. Many VC firms are still investing
   
   
2. Everybody went through a portfolio first reaction when things hit

The long term damage is on the new funds, the early funds will struggle the most with the situation

     3. There will be a drop in demand from investors overall

When demand goes down, prices go down so valuations will go down or sideways for a while. It’s important to not get too caught up in this. Newer funds will be more nervous than they were three or six months ago, you will see a drop in demand.

     4. Valuations of prices are going to go down

Private market valuations are often fake - if you need money, raise money

     5. If you look at the data, most VC firms make their best investments at times like this

This is a good time for some good companies to emerge, good VCs will be engaged but they will do it in a different way. Instead, VCs are using a lot of data and going through history of series A and seed deals to reconnect.

     6. Think about your numbers in an environment like this

Most VCs are expecting you to have weakened numbers so it’s a good time to be ok with that. Companies doing extremely well may be disguising actual trends so be smart about it. E.g. We grew 10X but we know we will concentrate on keeping about 20% of that - be cautious of you will lose credibility.

THE FOUNDER EXPERIENCE

with Ben Harris, Decibel & Mandeep Singh, Trouva

Raised 40m and 50m respectively, in a mixture of venture and debt.

Learnings and takeaways:

• VC tracking:
  Put all investors you’re interested in approaching into a spreadsheet
  Give access to current investors and advisors
  Log when you speak to them, get intros from current investors
• Be upfront 
• Have very scrutinised numbers before starting the process
  Conservative and realistic numbers
  Churn so they can understand what has happened
• Ensure you have good legal cover for guidance and to resolve the process
• Venture debt - most likely to get it when you don’t need it like when you have a lot of equity funding in
• Biggest struggle was that there was a big number of inbounds but Series B which means something different for every firm
• Firms may want a meeting but in reality they aren’t the right fund for the business - the business might be too early for some
  Do your research and this will save a lot of time and effort in the future
• Focus on a few firms and cut down the list

RESOURCE LIST: