2021 was a “watershed” moment for the European technology startup ecosystem, according to an update from Capchase.
More than $100 billion was invested in companies/businesses across the continent – “more than triple the amount in 2020.”
This has put founders in a “rare” – and “enviable” – position: “more money to help fund their dreams than ever before, with more power when agreeing terms with VCs than they’re used to previously.”
Orrick – the “number 1” venture capital law firm in Europe according to Pitchbook’s 2021 annual report – “analyzed data from nearly 500 venture financing deals they closed over the course of the year.”
Published last month in the report Deal Flow 2.0: European Venture Capital Deal Term Review 2021, that data shows “unequivocally that founders have used their newfound power to lock in better terms for themselves.”
Of the deals they closed in 2021, Orrick “reports that 90% of term sheets gave board appointment rights to founders – a 12% increase from a year before.”
This means that founders “retain greater control in future financing rounds and in determining the business’s growth strategy.”
In comparison, “only 84% of term sheets gave lead investors the same rights.” There was also a “marked increase in the total number of board seats, as founders sought to increase their control of and position in their companies.”
As mentioned in the update from Capchase:
“Another sign of more founder-friendly term sheets is the increasing number that include drag-along clauses, which enable majority shareholders to force minority shareholders to take part in a sale or liquidation. The number of deals that require founder consent to initiate drag-along processes, or give founders a veto over such clauses, range from 40% at seed-stage companies, to 10% at Series D and beyond.”
But after a year of “record-breaking” amounts of VC money pouring into Europe, the market now “faces various headwinds – meaning some companies will have to accept less ideal terms.”
Over the past couple years as the pandemic took its toll and drove interest rates down, investors were “incentivized to put more resources into venture capital due to a dearth of other asset classes giving high returns.”
Co-founder & CEO, Miguel Fernandez, has “predicted that as interest rates start increasing again, competition among VCs will lessen, resulting in lower valuations.”
For founders, this means that growing into sky-high valuations “will be harder, and they’ll have to prove strong fundamentals to be able to raise higher valuations in the future.”
Add to this the geopolitical risk, supply chain difficulties, and high inflation “plaguing economic recovery and dampening investor sentiment across the board.”
As noted in a blog post by Capchase, this “begs the question: how can you retain control over the business you’ve poured your heart, sweat, and tears into in a climate where VC funding is no longer as easy to come by?”
The firm also mentioned that traditional methods of startup financing “have almost always meant diluting your equity to access capital needed for growth.”
They added that on top of that, “the amount of time and energy required to agree a term sheet in the case of venture capital, or fulfill due diligence requirements in the case of venture debt, takes you away from actually running your business.”
But alternative financing providers such as Capchase are “changing that and giving European startups more flexibility.” They have “put founders of recurring revenue businesses in the driver’s seat, by letting you access up to 60% of your predictable ARR upfront.”
This allows you “to invest in growth as you see fit – make strategic hires, launch new marketing campaigns, or accelerate product development – with neither the drain on resources associated with a fundraise, nor the dilution of equity that comes with it.”
The company also shared:
“On the other hand, for founders that know they want to work with a VC as they grow, the ability to extend your runway without dilution means you can take the time you need to find the right growth partner and negotiate better terms, while knowing that you won’t run out of cash.”
They added:
“At exit, founding teams typically have a less than 15% share of equity in their company. This makes VC money some of the most expensive funding around. By ensuring that you’re in the best possible shape financially, and have the right metrics in place, you’re better placed to attract your ideal investors and negotiate from a stronger position.”
As noted in the update, the market conditions that allowed European startups to push for friendlier term sheets in 2021 “were always going to change at some point.”
But as Fintech continues to disrupt the startup financing landscape into 2022, ever-more solutions are “being made available to founders that allow you to grow on your own terms.”