This is not 2021 anymore... Different times are calling for different methods. How much you can raise in the current climate depends on ever-so-slightly changing factors.
So read this article and learn about the current meta of round financing: what are the options, which ones are available and for what purpose...
What type of financing is available?
There are many debt options to choose from. Here are the three main ones:
It’s a type of debt that sits lower than Senior Debt on the capital structure. It’s usually beneficial for companies with over £1m EBIDTA, which want to bolster growth.
The repayment schedule is easy on the borrower at first, who will only repay small monthly amounts until he finalizes the repayment with one larger bullet or balloon repayment. Learn more about Mezzanine Debt and how to access it.
Venture Debt is a solid way to finance your round. You have the opportunity to sign a flexible deal quickly.
Your company doesn’t necessarily need to be profitable yet to access such a loan. If you have solid metrics and a clear use of funds, you should easily be able to access anywhere between £2-30m.
It’s less than the average VC deals, but more likely to happen within 2023.
There are countless advantages to using Private Debt: for one it costs less at exit than venture capital.
Secondly, Private Debt deals allow for more flexibility: you do not dilute equity, so you remain in control of your operations, and covenants are much looser thanks to the surge of cov-lite deals, which cover 90% of current debt deals nowadays.
Private Debt can be used to perform share buybacks and regain ownership or bridge your way to more profitability and growth.
At last, it's quick to get around: in 12 weeks you could have access to your debt facility, provided you come organised and use a little help from an external advisor to streamline the process.
Overall, Private debt is gaining momentum.
Senior Debt (e.g. bank)
Senior Debt, or traditional bank loans, might be available too. Though you will need to have irreproachable creditworthiness. Banks are not prone to risk appetite, at least neither as much as they used to nor as much as VCs or Private Debt funds.
Oftentimes, a traditional bank will pair up with a Private Debt fund to provide a bigger facility to the investee and add stakeholders to provide more security for them. Senior Debt sits on top of will always be the first debt to be repaid in case your company fails, so Banks are almost certain not to lose any money on their deal.
The equity market has a vast range of options, but for tech scale-ups, these are the most important ones.
It is a great means for bigger companies from round D onwards.. They don’t necessarily have the same expertise in tech companies, as opposed to VC or Private Debt funds.
They are the go-to financing player for growing tech scale-up like yours, but there's a catch:
The investment frenzy they went through during 2021 is not only coming to an end but with it, a considerable retreat from risk-inducing transactions has been happening.
They are sitting on tons of dry powder but are not going to move it as much until we get out of the winter market...
They expect higher valuations and multiples. It’s been the most weather-friendly funding option during the bear market.
Nonetheless, they remain the top dog, and will greatly help your scale-up if you manage to get a deal done: If you can get a deal with VCs, go for it. It’s less likely to happen, however, than a debt financing deal, and will cost you around 20% of equity.
Don’t forget that your existing investors can also be willing to put more money on the table, though that usually means leading more ownership on the table.
Does your EBITDA / EV count?
Your EV, (Enterprise value) which is calculated through EDIBTA, in part, will count towards any equity deal. Private Debt funds care less about EBIDTA or Enterprise value. Financing loss-making companies are normal practice both with VC or Debt. Obviously, you will get bigger facilities with a bigger EBIDTA, but that's common sense.
The true power of a scale-up depends on a couple of things: whether you can acquire, or develop more value that separates you from the competition: intellectual property or the right personnel.
It can be hard to get by, especially without more funding, if you're at crunch time right now.
A debt facility can help you acquire those assets, and make you a bigger player, which in turn can help you secure a bigger VC round in the future.
Do you have to be profitable?
Loss-making companies are not excluded from the realm of funding beneficiaries. The high-growth, tech scale-up world is full of companies that have not made a dime of profit. Metrics are the name of the game, especially for SaaS enterprises.
Does downsizing affect how much capital we can raise?
Generally yes, downsizing affects the amount of cash you can bring to the table. It can be beneficial, for the simple reason that, in the current environment, it helps accelerate your pathway to profitability.
Profitability is always seen as a good indicator for investors, who might be willing to go to greater lengths and raise more funds for your company.
VC funds love lean teams. However, you want to make sure you still get enough revenue. Laying off important sales force can go to the detriment of revenue generation.
Weighing Your Options
Your options are laid out before you, but you need to think about availability and necessity. Some options might not be available now, as we said, 2023 is going to be a difficult year if you planned to go the venture capital route.
If what you need is quick access to cash to reach milestones, you might want to look into the Debt market. The pairing with an existing VC funding round is usually what works best, but it's a very versatile vehicle, so there's a lot you can do with it.
The amount of capital a mid-size tech company can raise depends on a variety of factors, such as the company's financial performance, growth potential, market conditions, and the investor's appetite for risk.
Typically, mid-size tech companies can raise anywhere from a few million to several hundred million dollars in venture capital (VC) funding. Private debt financing may also be an option, but the amount available may be lower compared to VC funding.
That said, context is important. If you've read carefully, you know how beneficial debt can be, even towards securing a VC backed deal in the future.
In terms of private debt financing, mid-size tech companies may be able to secure anywhere from a few million to tens of millions of dollars in funding, depending on their creditworthiness and other factors.
Keep in mind the actual amount of capital a mid-size tech company can raise will depend on its specific circumstances and the terms negotiated with investors.