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Beyond VC: The fundraising alternatives for Europe’s startups

Venture activity in Europe is on track for a record year, but alternative funding routes are becoming increasingly popular among founders who don’t want to give up ownership.

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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 couple of weeks, he received two separate offers, for $20 million and $30 million.

He didn’t intend to take either.

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

VCs have no shortage of dry powder to deploy, with Europe on track for venture investment to hit new heights. Q1 2021 saw a record amount of capital invested, with €17.6 billion (about $21.3 billion) spread across more than 1,900 deals, according to PitchBook data. But for many startups, taking VC investment comes at a cost: control.

When a VC backs a startup, they will sometimes take a seat on its board, which means they often have a say in how the company is run. This works well when a firm has expertise in the sector they are investing in, but that is not always the case, as the fear of missing out on the next big thing can push investors to spend money in areas where they have little or no experience.

At times, VC influence 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 follow-on rounds and eventually provide an exit for their VC backers.

In Lemlist’s case, bootstrapping was enough—but relying on personal savings and a company’s first sales, with no other support, is not always an option. What is available for startups that don’t want to go down the VC route?

Revenue-based financing

Revenue-based financing has been gaining traction over the past several years for founders who don’t want to raise equity. As the name suggests, companies receive capital in exchange for a share of future revenue.

Similar to any loan, it is a fixed amount and doesn’t give away any equity, so once repaid, there is no further obligation. The key difference is that repayments are directly linked to performance. If a startup’s expected revenue falls short of expectations, then repayments decrease. Similarly, if revenue is bigger than predicted, the financing is paid off ahead of schedule.

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

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

Venture debt

Venture debt can be an option for startups that have already raised VC funding but don’t want to further dilute existing stakes. It is aimed at high-growth scale-ups that have yet to reach profitability but are already established in their markets.

Unlike a conventional loan from a bank, venture debt doesn’t require collateral, but lenders have the right to buy a small portion of equity at a fixed price during the term of the loan. Venture debt is short to medium-term in nature and is usually calculated using the amount raised in a company’s last round of equity financing—usually between 25% and 50% of the last round.

The US already has a maturing venture debt market. Meanwhile, in Europe, several commercial banks, including Barclays and Santander, offer venture debt, as does the European Investment Bank. There are also specialized venture debt 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 portfolio companies, including Delivery Hero and ridehailing startup Gett.

Equity-based crowdfunding

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

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

Featured image by LvNL/Getty Images

  • leah-hodgson-photo.jpg
    Written by Leah Hodgson
    Leah Hodgson is a London-based senior reporter for PitchBook covering venture capital across Europe and the Middle East. Leah graduated from the University of Surrey with a BA in international politics with French. She has previously been a radio reporter in France. She later turned to financial journalism, covering the wealth management industry. She joined PitchBook in 2018.
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