• Xavier Van Hove

Financing growth & avoiding dilution

Savings, Angel Investors, Venture Capitalists, Venture Debt - what to get when (& a bit about how)

So let's start with a very busy chart and probably the only thing you need to look at if you're in a hurry. There are four main things to look at:

- Survival rate - that's the bar chart

- Valuations - that's the line

- Financing options - that's the second row of boxes

- Founder share - that's bottom row of boxes, with the percentage that keeps getting smaller

The chart is based on our best estimate for averages for US Start-Ups. Figures in Europe are less readily available so it's hard to be as scientific, but anecdotally, we think they are about the same.

#1 - Founder share matters

Let's start with the elephant in the room that no one ever likes talking about in the world of venture capitalism: the share of the business the Founders keep hold of. As you can see from the chart, by the time a business is sold, the average Founders only own about 12% of the business.

Of course, that needs to be multiplied by the value of the business, but that's down to you - if your idea is great, and you can execute it well and sell it to customers even better, than the value will be created independent of how you finance your business.

Dilution matters.

#2 - Therefore, financing matters from day 1

Most businesses are started with the Founders, their friends and their family's savings. Realistically, no-one else is going to invest in an idea. You'll need to at the very least build it before you can convince ever the most daring-do Angel Investor to come in.

You can however be smart about making your cash go further. For starter, make sure you claim R&D Tax Credit on any R&D you do, and if you can, get a government grant:

  • R&D Tax Credit: HMRC will refund you about 1/3 of your R&D spending - you can file for these yourself in your CT600, but we would strongly suggest you use an R&D Tax Credit specialist. Not only will they save you time, they'll also likely be able to ensure you fully claim everything you can, whilst avoiding the risk of over-claiming and having the claim held up for months whilst HMRC reviews it in depth.

  • Government grants can go even further than R&D Tax Credit. The most readily available type of grants is Innovate UK, which typically refunds 70-80% of your expenses on a project. Getting a grant is however not easy - about 1 in 12 application succeeds - as they have a very high technological threshold. Again, a consultant can help with this. Note R&D Tax Credits and government grants are usually mutually exclusive (i.e. you cannot claim R&D Tax Credit on something you are funding via a grant).

Both of those are essentially "free money" the government makes available to help early stage companies. Despite this, we see far too many Start-Ups spend too much time chasing Angels (and being diluted in the process) rather than try to get a grant or making their own money go as far as possible by applying for Tax Credit.

We of course operate in this space - so here's a small sales pitch: Should you manage to receive an Innovate UK grant, or should you wish to get an advance on your R&D Tax Credit, we can help fund those.

First build it with your (and the government's) money - before you chase Angels.

#3 - Sales before Angels

Once you've managed to get something built, and it looks good, remember Peter Thiel's gospel to all Start-Ups

"you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business - no matter how good the product.” ― Peter Thiel, Zero to One

In other words, if you can't sell it to customers, you're not going to sell it to anyone, including Angel Investors. That's the reality of the game - we've seen literally thousands of Start-Ups over the years and, with the notable exceptions of biotech and medtech where regulation force a very different business model, we can count on the fingers of one hand those that managed to do a Series A without sales.

The point of getting Angel Investors is to accelerate your growth, not to kick-start it. You should have some sales, or a readily converted pipeline with contracts signed before you go and see Angels.

#4 - Series A - before, during & after

Once you've received Angel Investors and your sales are ramping up, you'll most likely still be heavily burning cash as, if you're doing it right, you're going to be hiring and building your product ahead in advance of what's required right now. Thus, Series A. However, what's the right time to time to do a Series A?

The answer is of course as late as possible. The more sales you have, and the more milestones you've hit in product development, the higher the valuation you will achieve on your Series A - which will also mean higher valuations for subsequent rounds.

A loan my therefore be appropriate to bridge (and delay) Series A, in order to increase the cash runway right now and achieve a higher valuation later. However, it's important to note that lenders will likely not bridge more than 10-20% of your expected Series A, will want some comfort from existing Angels, and will want to know you're "ready to pull the trigger" on Series A - i.e. your data room is ready, you've started to engage investors and have received positive feedback. The bridge should therefore be < 1 year in duration.

Once you are pulling the trigger on your Series A, you may wish to consider doing Venture Debt alongside - lenders will typically lend you up to 25% of your Series A in Venture Debt. The advantage of this is to reduce dilution by reducing the amount that needs to raised in Series A. Venture Debt typically has a warrant attached, but it is only for 20-50% of the loan amount, reducing the dilution on Founders.

#5 - Growth Loans (aka MRR/Revenue Sharing)

Growth Loans, also known as Monthly Recurring Revenues, or Revenue Share loans are a relatively new product. The loan amount is based on your existing or contracted revenues, and the lender will be repaid monthly based on those.

The advantage of Growth Loan is zero dilution, and repayments flex with your revenues. The disadvantage is costs with a high fixed upfront charge, relatively short durations, and inflexibility - lenders in this space are more akin traditional banks than venture capitalists - there will be zero flex on payment terms once agreed.

# 6- The costs

The table above covers, to the best of our ability, the terms available in the market.


Dilution is unavoidable but it should be done on your terms rather than on the Venture Capitalists'. Using some debt can help achieve this.

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