Letter number 87 of July 2015


News : What changes at a startup after a fundraising

By Guilhem Bertholet

This month, just this once, we have decided to replace our usual news article with an article by Guilhem Bertholet, “What changes at a startup after a fundraising”, published on his blog (www.guilhembertholet.com). We thought that this article was very interesting, especially for those of our readers who have set up or who are going to set up their own companies. We have added a few illustrations and comments by entrepreneurs who have been there and done that:

  • Fabrice Gerschel (F.G.) who in 2008 launched Philosphie Magazine. Buoyed by the success of the magazine in France, he called on investors in 2012 to co-finance the launch of the magazine in Germany.

  • Patrice Lamothe (P.L.), one of the founders of Pearltrees, a service for organising, exploring and sharing web pages, notes, photos and files. This ambitious project was financed through four rounds of fundraising in 2008, 2009, 2010 and 2012.

  • Adrien Nussenbaum (A.N.) co-creator of Mirakl, a stock market platform. The development of Mirakl was accelerated by a fundraising of €2.5m in November 2012.

Obviously, fundraising is a recurrent topic in the small ecosystem of startups. And rightly so – for many it is a mandatory step, ideally to be taken once the startup has achieved its model on a small scale, in order to be able to scale and grow its business. It is also sometimes a “bad” goal, which is pursued for its own sake. And sometimes even an “end in itself” for some. But that’s not what I want to talk about today.

I've been talking to several entrepreneur friends who raised funds recently (between €500k and €3m, more or less, to give you an idea of the type of fundraising. The feedback is very varied and there's obviously a lot of “who I raised funds from" and “what happened to the business plan”. But I thought it would be worthwhile (given all that I have witnessed in this regard, both at the startups in which I hold shares or when I was part of the HEC incubator) to take a closer look and try find out, for all of those who are in the process of looking for funds or who are thinking about doing so, “what changes in the life of a startup and for its founders, once the investors are in place”.

P.L. “I believe that the effect of each round of fundraising is different, depending on the startup’s activity and on how mature it is. Seed capital, which transforms a project into a “real” startup, has very different effects than capital raised in series A, B or C, which gradually structure the startup, and draw it towards a goal that is as paradoxical as it is inevitable - the transition from startup to full-blown company. Their real common point is perhaps that they all materialise a step between “research lab for a new entity” of the initial stage and "full-blown company" of the final stage."

So, here’s a brief overview.

You’re no longer completely in charge

This is probably the main change following the first round of fundraising – you’ve now got new partners! So they also get to vote on decisions, even though they're minority shareholders. At the very least, they vote on certain types of decisions (hiring, budgets, compensation, sale of shares, etc.). It’s a bit like you now have a room-mate – you have to learn to live together!

And what’s more, you know more or less when you’re going to be “evicted”.

With the exception of some business angels, most funds are thinking about the time when they’re going to exit when they invest. Depending on the maturity of the fund (in general they have a life of between 8 and 12 years, after which they sell all of their shares), you know that at some stage, an exit solution will have to be found. Although at the time of the fundraising you're obviously in agreement (yes, you do want to get rich and sell your company to a large group in 5 years’ time), in reality, your company generally grows at a much slower pace and in the end, there are fewer options. And if you’re not one of the fund’s super stars that everyone’s fighting over, you may well have to sell a company you enjoy working in for not that much money. Of course, that’s not generally the case and you’ve got a bit of time to get yourself ready, but it's a good thing to bear it in mind.

The term changes

It’s often best to forget about the very long term and to keep “short term” figures, focus on structuring the company, on sales growth and possibly, even after a few years, on profitability, before thinking of another round of fundraising.

Without going as far as producing quarterly figures like a listed company, you should, however, look very closely at your sales and growth figures.

Someone sitting on your shoulder

You are completely focussed on your startup and this is probably the first time that you've started up a company. Or this is the first time that you've got so far. Having someone with you, who’s already been there and done that dozens of times, and sometimes for “star” startups, who’s seen all of the startups on the market with the same issues as yours (for funds – even if they are becoming more professional, business angels don’t have the same deal flow), and who can bring you the best practices and the best ways of structuring your company.  This is something that everyone setting up a startup dreams about. And this is partially what your investors can and will bring you, if you’re willing to ask for and accept their contribution.

F.G. “I’d also add that it is a sort of super-ego: any decision, even a relatively small decision, cannot be taken completely intuitively, and it boils down to questions such as “is this in line with the strategy I announced to my investors”, “am I fully focussed on what I said were my priorities”, etc. the presence (even at a distance and non-intrusive) of external shareholders, and the prospect of reporting, forces the entrepreneur to explain his or her decisions.”

A.N.: “I also think that it’s important to play the game in terms of the new corporate governance with the fund, but you shouldn’t expect funds to tell you what to do on the basis of their other investments. For me, it’s a bit like in cooking, I don’t set much store by recipes (except maybe for baking J) because everything depends on your equipment, on the type of cooker you have, the origin of your ingredients, etc.

One point that is very important in my view is that you should be guided by the saying “get money from customers, not from investors”, or at least in as far as this is possible J”.

More formalities, more reporting

    Fundraising normally triggers the introduction of reporting and the need to pay more attention to all aspects of the business. And that’s a good thing! Naturally, the entrepreneur doesn't think that figures are all that important  and nor is the fact of spending time, for example once a month, drawing up key management indicators and commenting on the progress made (or not) in terms of the project and of the company. With an investor behind you’re going to have to introduce a monitoring system for the business, and later you’ll be able to see more clearly how your business is doing. You’ll feel a bit like a schoolboy who hasn’t learnt his lesson properly, the first time you present your figures and they don’t add up. But figures are your friends – they never lie. So, you have to cultivate a love for reporting, which one day, will almost certainly be your saving grace!

F.G.: “When you’re on your own, you tend only to have a financial reporting system and cash flow forecasts in once situation – when you haven't got enough short-term cash (and even then it's not always the case). When cash is no problem, there is always something better to do than spend time on Excel and reporting just never seems to get done. This is unthinkable when you have shareholders who are worthy of the name.”

More financial resources

It may be stating the obvious, by fundraising is really all about the money, isn’t it? And if you’ve been smart and managed to spend little to produce a lot up until now, don’t think that this makes you special. You’re also quite capable of doing very little with a lot of money. The investor is there to help you structure your spending properly, to make sure that you don’t get duped into overspending (there are some companies that specialise in following fundraising and then launching a “commercial attack”, especially for spending on communications), to teach you to hire wisely, and most of the time, to force you to stick to your budget, because there are many entrepreneurs who don't like spending at all.

P.L.: “Although the concrete consequences of a fundraising on the degree of control enjoyed  by the founders, the strategy of the company and its operating method vary extensively, we still find, step after step, a certain number of constants that occur when these thresholds are reached:

   The development of the field of possibilities. With more resources, of course, but also more financial and human stability, new opportunities appear for all functions – new markets, new distribution channels, new product development, new technical capacity, etc.

   2. The expansion of time. Although investors’ time is limited, it is generally a lot more extensive and more certain than the pre-financing runway.

   3. The crystallisation of development assumptions. Even though, in theory, everyone agrees that a startup is supposed to adapt as soon as possible to its environment, a plan to raise funds marks the "validation" and thus the solidification of certain assumptions. Accordingly, the new investors, the existing investors, the employees, the press, the public, the founders and anyone else you can think of, whether voluntarily or not, will feel more tied to the project as a result of the plan to raise funds.  In practice, the startup's room for manoeuvre will be reduced by as much.

 These consequences may seem to be contradictory but they basically point in the same direction. They de-multiply the means for reaching a target, but force the organisation to aim more specifically and more efficiently, all are to the detriment of other options and other opportunities. It’s up to the founders and their partners not to let themselves be overwhelmed by new possibilities or to be bogged down by the initial plan. In a word, they need to find the right tempo.”

A little more attention

Raising funds will obviously attract a bit of attention.  The usual subjects that became FrenchWeb, TechCrunch, RudeBaguette, Madyness, Clubic Pro, PresseCitron & co obviously, but also the startup ecosystem as a whole. And it has to be said, more and more general press which has understood that entrepreneurship is a topic that sells (well advertising hoarding in any case).  And obviously, your own friends and family who will be starting to say to themselves, well, you’re not as crazy as all that and your idea could well work in the end.

A little more credibility

This ties in with the previous point, but not only. In the eyes of customers (especially large accounts) or potential staff, your company suddenly looks more serious when it has a few hundred thousand euros in its bank account.   And obviously, it’s important for the running of the business – doors suddenly open and telephone calls are suddenly returned! Especially if your investor opens up its network to you, if it has good contacts that is.

A change in relationships between partners

Yes indeed, until now things were going OK, we were all in the same boat. Now that the first signs of success are appearing, there is a real risk of the team splitting up. It is vital at this stage always to keep the lines of communication open and not intentionally change the relationship, and to do all in your power to ensure that it remains the same, and not become swollen headed.  Nothing is in the bag, this is just the beginning, and it’s always a good idea to take the time (i) to call yourself into question (don't allow small problems to build up and explode in your face) and (ii) to take a close look at your personal aims, the company’s aims and the aims you have set for the company. And you should share them with the other partners so as to be sure that there are no major divergences.

Work on a day-to-day basis is no longer the same.

Up until now, you’ve been doing a little bit of everything, but, as the team gets bigger, you’re going to have to take responsibility for doing your real job.  CEO, CTO, head of sales, marketing, etc. The better things go for the company, the more specialised and focused you’ll have to be. The beauty lies in the fact that you know each other well and at the same time, you know what the real keys for the success of the startup are. The challenge is to match up the two of them. But the time of saying “I do everything all of the time” should be behind you. Your goal now is to make things clear, to do things for the first time, to draft processes, and to find someone better than you to implement them. My humble advice to CEOs is to reread this article.

Welcome Politics!

If you haven’t already done so, now is the time that you’re going to have to rely on your political skills for managing information, announcements, the interests and the aims of each of your shareholders in order to ensure that everything is running nicely, that you’re all talking to each other, working in one-to-one sessions before General Meetings, etc. Enjoy J !

F.G.: “the satisfaction criterion is no longer exactly the same. When you’re on your own, you’re happy when you’re doing better than others on the same market, and unhappy when this is not the case. Investors, however, have countless other investment opportunities. If your market is under-performing, the question to be asked is no longer “are we doing better than the others”, but “have we chosen the right market to invest in”. This is very humbling, but it’s also a very healthy question.”

In conclusion, fundraising is an obligatory step for a lot of startups. It's not a step that should be dreaded and there are a lot of very good investors, Business Angels or Venture Capitalist funds on the market. Fundraising can be a good experience, but you’d be fooling yourself if you thought that it wouldn’t change anything for your startup.  So it’s neither good nor bad, but a change of state, which it’s best to be aware of before taking your decisions and going down this road.


We’d like to thank Adrien, Fabrice and Patrice for their contributions.

Statistics : EV/EBITDA multiples for companies with EV between €15m and €150m and market prices

A newcomer to finance might think that the market for the purchase and sale of companies is a separate market with its own rules, its own equilibria, its own valuation methods and its own participants.

This is absolutely wrong. Indeed the market for corporate control is simply a segment of the financial market. The valuation methods used in this segment are based on the same principles as those used to measure the value of a financial instrument. Experience has proven that the higher the stock market, the higher the price of unlisted companies as illustrated by this graph:

Participants in the market for corporate control think the same way as investors in the
financial market.

Research : Strategic acquirers and financial acquirers: their favourite targets

With Simon Gueguen – Lecturer-researcher at the University of Paris Dauphine

During transactions to sell or take control over a firm, it is common to draw a distinction between two types of potential acquirers – strategic or financial acquirers. The strategic acquirer has an industrial agenda. Its activity is generally linked to that of the target (competitor, customer, supplier, etc.). The main aim is to achieve synergies following the acquisition – the maximum price the strategic acquirer is prepared to pay depends on expectations of such synergies. The financial acquirer (for example a private equity fund) for its part hopes to identify targets that it believes are under-valued. It sometimes benefits from expertise that enables it to improve the management of the acquired entity. It may also have a capacity to raise funds for financing the acquisition on good terms.

Research in the area of finance generally considers (with studies to back it up) that strategic acquirers, through their capacity to generate synergies, give higher valuations to targets than financial acquirers do. The study that we present this month[1] does not call this general idea into question but does make things a lot clearer – it shows that each of these two types of acquirers has its preferred targets.

There are several ways of organising negotiations for taking control. One of them, the auction system[2], has an advantage in the eyes of the researcher. It involves a succession of bids which can go from the letter of intent (non-binding as it does not create an obligation for the bidder) to the final offer (binding as it binds the bidder), made by the various potential acquirers. Gorbenko and Malenko manually collected detailed information on 349 auctions for the acquisition of US firms between 2000 and 2008[3]. Using a sophisticated technique (and a making a few assumptions), they estimated the valuation of the target for the various bidders. Compared with a simple observation of the result of the auction, this presents at least two advantages:

  • it avoids a selection bias which occurs when only the winner of the auction is observed;

  • it doesn’t assimilate the valuation to the final price, since the bids are generally lower than the maximum price that the bidder is prepared to pay.

The study confirms that, generally, valuations by strategic acquirers are higher than valuations by financial acquirers (a premium of 16.7% for strategic acquirers compared with 11.7% for financial acquirers). But, more interestingly, some targets (23% of the sample) are systematically given a higher value by financial acquirers than by strategic acquirers – targets whose recent performances have been poor. This is consistent with the idea that financial acquirers have the expertise needed to turn companies in difficulty around.

Strategic acquirers, for their part, tend to give a high value to targets that present good investment opportunities. There are two reasons for this – the ability to generate synergies, but also, for the management of the strategic acquirer, to capture private profits.

Another interesting result of this work is the study of the consequences of macro-economic conditions. The authors show that lower borrowing rates increase the valuation given by financial acquirers but not by strategic acquirers. Financial acquirers in fact tend to use their special access to the debt market in order to finance acquisitions[4].

Taken globally, the results of this study lead us to believe that there is a certain amount of segmentation on the takeovers market. Strategic acquirers are interested in the synergies generated by the acquisition of targets that are carrying little debt and that are investing. Financial acquirers are interested in turnaround operations and expertise in access to financing.

[1] A.S.GORBENKO and A.MALENKO (2014), Strategic and financial bidders in takeover auctions, Journal of Finance, vol.69(6), pages 2513 à 2525.

[2] For more on auction processes, see chapter 44 of the Vernimmen

[3] Gorbenko and Malenko only rely on 100% cash acquisitions, so as to avoid depending on the valuation of the acquirer itself.

[4] See also the article on LBOs, The Vernimmen.con Newsletter of December 2014, # 85.


Q&A : What is a portability clause in a loan contract?

A portability clause in a debt contract allows a change in control over the borrower to happen without triggering early repayment of the debt. Generally, lenders protect themselves from a change in shareholders, which could result in a change in the company’s strategy and thus a change in the risk on their loans, through an early repayment clause attached to their loans.

Portability clause spread widely in Europe in 2013, for high yield bond loans by companies under LBO. This technique facilitates the change of control of a company under LBO as the buyer may, as a result thereof, have no new debt financing to structure, thus reducing its uncertainty and expenses, with the possibility of refinancing this debt at a later stage.

Debt portability, which is a good thing for lenders but less of a good thing for investors in debt, has emerged as a result of a massive increase in investors seeking returns in a context of falling interest rates.