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  • Bilanz Capital

Navigating the Startup Funding Maze: Insights from Our Journey as an Advisor

In the dynamic world of technology startups, securing pre-series A funding can be an intimidating challenge. As advisors to a promising technology startup, our primary mission was to guide them on this critical path to success. We engaged with various potential investors, each with unique approaches and interests, and we'd like to share a significant encounter that shed light on the art of deal-making in the startup world.

Once we thoroughly assessed the startup's pitch deck and financial projections, ensuring alignment with their go-to-market (GTM) strategy and overall vision, we eagerly set out to engage with targeted investors. Our efforts yielded promising results, sparking considerable interest among potential backers. Among them, a reputable global family office stood out, expressing strong interest in single-handedly subscribing to the full funding round.

This was a game-changing opportunity, one that had the potential to catapult the startup to new heights. Such investors can not only add value to the future rounds but also send very positive signals to the Top companies which were the Target Market for this B2B startup.

With such a significant player in the mix, the promoters decided to pause the pitching process temporarily, prioritizing the family office. The intention was to provide ample time for the family office to conduct their thorough Business Due Diligence (DD) process.

However, as the adage goes, "expect the unexpected," we encountered an unforeseen challenge. The family office's limited staff, relying on external advisors and CxOs, meant that their DD took longer than anticipated, resulting in delays that affected other investors as well.

Nonetheless, we maintained open communication with the family office, ensuring they had all the necessary information to expedite their DD. At the same time, as an advisor, we kept the communication going with other investors as well to provide adequate fail-safe if something goes wrong, and thank god we did.

The DD process gradually neared its conclusion, and the family office reaffirmed its interest in investing. However, their proposed valuation was approximately 25% to 30% lower than the standard industry practice for startups in the area. We attempted to negotiate, suggesting a minor increase in the valuation to test their level of empathy. To our surprise, they remained unyielding, basing their valuation on an unconventional approach (Average revenue multiple of the traded giants in that category- Yes!) that did not align with industry norms.

Despite our advice against such an approach, the promoters wanted to explore further, considering the family office's global presence and potential strategic value.

During a subsequent discussion, the family office proposed an add-on structure to sweeten the deal. They offered a multiyear contract to buy the services of the startup for their own companies. But to our surprise, rather than a discount, they were asking for additional equity worth the Total Contract Value with their own companies at the same valuation. So basically they will pay for the services on one hand and take away the equity worth that TCV on the other hand at a lower valuation. All permutations suggested that this add-on structure heavily favored the family office. They presented this structure as a new global approach prescribed by numerous promoters in the United States.

Our take was that if they were capable to demand equity to arrange a contract between their own subsidiaries, one can only imagine what their demand would be when making introductions for new clients or generating interest among their known investor base for the next round. These are very basic expectations from seasoned investors by startup founders.

This proposal raised more red flags, and we strongly advised the startup to reject the offer. We reminded them that such behavior could jeopardize the startup's future, and the value addition from the family office seemed minimal. The family office was unable to complete basic DD on time, and it was unlikely that they would be able to provide any additional value in future rounds. They lacked resources. Credible names are important, but not at the expense of a chaotic board and misaligned visions.

Ultimately, founders embraced our guidance and chose to accept other offers with a lower ticket size but with reasonable terms and expected valuation multiple. Also, their level of engagement indicated that there were no other expectations for adding value to the company, despite them being a global investor as well. There was no mention of any new global structure to extract equity from the founders.

As their advisor, we helped them navigate the fundraising process and identify the best available investor with the right terms. Never pressuring founders to take the deal which may go against them in the future, we knew that going against the family office would not only affect our success fees but may compromise our relationship with such a recognized investor. Also, we knew that with a bit of a nudge, we would have convinced the founders to take the bad deal, but our focus was on ensuring the startup's success and growth without compromising the founders' goals. At Bilanz Capital, we are not just advisors; we are steadfast allies in the pursuit of the company’s success.

It became challenging to persuade the rest of the investors, but that is a topic for the next blog. Some of the takeaways for the founders are as follows:

  • Keep pitching until you have a definitive agreement in hand, even if it gets frustrating.

  • Keep warm conversations going with even the smallest investors who expressed interest. You never know when they might become your savior.

  • Cut your losses and move on when you realize the investor is unreasonable, inflexible, and unempathetic.

  • Do not be swayed by new age structures. Keep your eyes on the prize, follow the trail, and everything will become clear. Complicated structures are fine to negotiate as long as they are based on the right reasons and intent.

At Bilanz Capital Partner, we believe that every company has the potential to thrive. Our approach combines expert guidance and strategic insights to help you navigate the challenges of the funding landscape. If you're seeking the right path with a long-term partner to funding success, we'd be delighted to accompany you on this transformative journey. Get in touch with us today to explore how we can support your company's growth.

Disclaimer: Please note that some information in this blog may be inaccurate or altered to conceal the identities of the parties involved. The purpose of this blog is to increase awareness about the deal-making process. While there is an abundance of information available about the facts of deals, there is often a lack of context. Therefore, this blog aims to provide insights into the process rather than just the outcomes.


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