The concept of multiple funding rounds is familiar to most business owners – and particularly to those entrepreneurs who are focused on steering their companies on a growth path that runs from ‘startup’ to ‘scale-up’.
The classic funding escalator runs from seed funding – which might be sourced from angels, VCs, an accelerator, a government body or, these days, an AltFi platform – to growth finance, Series A and beyond. Each of these funding rounds tends to represent a milestone for the business, which satisfies the expectations of existing investors while triggering the need for further capital.
So where does alternative finance fit into this equation?
The launch of the first UK AltFi platforms a little over five years has undeniably had a huge impact on the corporate finance market. On one hand, the arrival of equity crowdfunding sites provided a further source of seed and early stage capital. Meanwhile, market lending platforms offered another source of debt finance at a time when banks were cutting back on lending. Many companies will have taken advantage of both types of platform – for instance: crowdfunding to finance growth and create a large community of shareholders; and borrowing to, say, buy equipment or help manage cash flow.
Case by Case
In that respect, Altfi has made it possible for small and medium sized businesses to plan for and execute multiple funding events on what you could describe as a needs-must or horses-for-courses basis. Or to put it another way, when a funding requirement arises, alternative finance platforms – which also include invoice trading – are offering options that weren’t available a decade ago.
From the perspective of a broker or adviser, it is, therefore, vital understand the totality of the alternative finance marketplace in terms of the positioning and unique offering of the large number of platform providers. Some decisions are perhaps easily made. For instance, if a company needs to not only raise money but also increase its profile, then the best option may be to sell shares via a platform to hundreds of people who will also act as advocates and ambassadors.
But not all crowdfunding platforms are equal. Some attract large numbers of general investors, others are dominated by professionals, including angels and VCs. There are also differences in the way that shares are held – either by individuals or by the platforms themselves on behalf their investors.
Equally, it is important to understand the positioning of the debt platforms. Each will have lending criteria and their own communities of investors, with different expectations in terms of returns and timelines.
The Funding Escalator
But there is another way to approach multiple funding round opportunities – and that is to see each round as part of a process.
A company may begin by raising money on a rewards crowdfunding site to finance the production of a limited run of a particular product and in doing so secure pre-sales (through the campaign itself) and assess likely demand. With no shareholders, that same company might then go to raise further funds from an equity crowdfunding site. The advantage here is that larger sums can be raised on equity platforms and there is an opportunity to bring on board funders who are not only advocates but also professional investors with industry contacts. In other words, people who can provide support to help drive the business forward.
A business may go through multiple crowdfunding rounds on the same or different platforms , before pursuing additional funding exclusively from angels or VCs.
There is perhaps a nominal danger that professional investors will stay clear of companies that already have dozens or perhaps hundreds of crowdfunding investors, all with voting rights. In reality if shares are held on a nominee basis, then the voting right problem doesn’t really apply. Meanwhile, platforms such as Crowdcube, enable voting rights to be restricted to the largest shareholders. VCs are increasingly comfortable backing companies that have previously taken the crowdfunding route.
But planning is essential. A company that is looking forward to multiple funding rounds should lay out a clear game plan. Investors will, of course, need to know what the company is setting out to achieve and how it plans to get there. But managers, founders and advisers should also think carefully about issues such as valuation (how much of the business they plan to sell) and the most appropriate platforms in terms of shareholder agreements and voting rights arrangements.
And as the business grows, market lending platforms can enable businesses to access additional funding for specific purposes, without surrendering more equity and diluting the shareholdings of existing investors. In this respect, debt finance can sit constructively alongside equity funding as part of a broad approach to financing and maintaining growth. Debt platforms such as that operated by The Route – Finance can be a useful tool in addressing special circumstances that fall outside the growth story.
Alternative Finance is perhaps not a complete funding solution, but increasingly, AltFi platforms can provide not only a first step on the funding escalator but additional funds through subsequent rounds as a business grows.
The Alternative Finance universe offers solutions for businesses across a range of circumstances and no two providers are the same. To help brokers and businesses identify appropriate providers, the Route – Finance has published The Alternative Finance Guide 2017. Download here.