Can founders get a second bite at the apple?

Many founders, particularly in Fintech, are at a crossroads. While their startups demonstrate solid revenue and product-market fit, their tapering growth disqualifies them from traditional VC follow-on funding. How can they extend their runway?

🏛️ Capital raise: with Fintech VC investments down 44% in 2023, funding remains tight despite more positive signs in Q1. Many venture-backed startups find it hard to secure follow ons as VC firms tend to focus on their best performers to maximize returns and DPI. Startups with modest or linear growth face less appealing fundraising options: insider or down rounds, harsher terms, and sometimes no funding at all.

💵 Non-dilutive financing: revenue-based financing and term loans have emerged as a popular alternative for startups keen on preserving their equity. However, these options require startups to sustain revenue growth that significantly surpasses capital costs to avoid jeopardizing repayment and financial stability. The same logic applies to venture debt to a large degree.

🏷️ Company sale: it offers another avenue for founders (and their investors), but they need to find a suitable counterpart. There are early signs of renewed M&A activity, but smaller companies might surprisingly wrestle to find buyers even at lower valuations. Founders should consider putting extra work to recalibrate and operationalize their business before selling: it will make it more acquirable, hence valuable, compared to a quick sale.

🙌🏻 Structured growth equity: this innovative option involves selling a controlling stake (majority or minority paired with preferential rights) to a fund or qualified sponsor, enabling the founder to retain substantial equity in the new venture. This approach provides capital for growth and a potential future payout for the existing founders and investors once the business has been rebooted then exited at a higher valuation.

In short: funding is a propellant for (business) rocket ships: it accelerates the growth of exceptional teams and ventures, and delivers similarly exceptional returns. But most startups, in Fintech and beyond, are meant to be steady businesses with robust growth. For founders who won't achieve a venture scale outcome, structured growth equity is a viable financing solution that combines capital with operational expertise. It preserves significant upside for founders, so they can get their fair bite at the apple 🍎.