Capital for your startup
Capital for a startup was the topic after a conversation with Rico from Agera in July 2014. I wanted to share thoughts on how risk, ownership and expectations could change through several funding rounds.
Capital for a startup could come in several rounds
The video began with a conversation with Rico from Agera. I said that at 22, he had around 40 employees, including about 12–14 Swedes. Things were moving fast, and we began discussing raising capital.
His question was good: Why did some companies get money several times? If a startup first received 30 million, then 40 million, was that a sign something had gone wrong?
I used Autobutler as an example but stressed I did not know all the details. It was more a case to explain the thinking than a review of their actual agreements.
Nor was I a venture capital expert. I had raised capital a few times myself and otherwise tried to manage alone. Here I shared my thoughts in July 2014.
The first money arrived while much remained uncertain
I began with the early money, which I called angel capital, and mentioned friends and family. You had an idea and had worked on it a little, perhaps had some money yourself and got help from parents or friends.
I also made the dry remark that whether it was a good idea could be debated if you wanted to keep those friends. The point was that early investment carried great risk.
Perhaps you had a prototype and something showing people liked the concept. But that was not the same as knowing it could become a business.
So I called the first money expensive. The price was about how much of the company you gave up, not just how many kroner came in.
A good idea was not necessarily a good business
I used the terms proof of concept and proof of business. First: Does the concept work, and do people like it? Then: Can it also work financially as a business?
My slightly silly example was a bank where you handed over a hundred-kroner note and got a thousand-kroner note back. Customers would be happy. In that sense, the concept worked.
But the bank lost 900 kroner each time. Repeating it did not improve the business. That was the difference I wanted to show: Enthusiastic users do not themselves prove sustainable economics.
When an investor came in very early, many questions remained unanswered. I mentioned that in some cases you might give up half the company. So I would pay attention to negotiations and what you actually had to show.
Why not raise all the money at once?
You could imagine raising a large amount initially if someone would invest it. But if the company had not yet demonstrated a business, you might give up a very large ownership stake.
That was my explanation for investments often coming in portions. You raised money, used it to progress and hopefully had more to show when raising the next round.
If uncertainty had decreased and opportunities grown, perhaps the next investor could pay more for a smaller stake. That was the thinking I wanted to explain, not a rule that the next round always improved.
Autobutler was a numerical example using rumours and guesses
I mentioned early investors I believed had been involved with Autobutler, including Jesper Buch and people behind Bilbasen and Benjamin Media. I also said I did not know how much they invested.
Then I repeated a rumour of 30 million kroner for 25 per cent of the company. I did not know whether it was true but thought it sounded plausible as an example.
I also discussed a later round of 40 million. I did not know the stake. I guessed and used various figures around 10–15 per cent in the explanation. So it was not precise information about ownership.
What mattered to my argument was how an investor might see a company differently six months later. The previous investor had examined the business, and the money could meanwhile have been put to work.
A new market could change an investor’s assessment
I imagined the company opening offices in several countries and showing the model worked there, too. If something worked in Denmark and then in Sweden and Norway, there was a different basis for discussing market size.
In my explanation, the investor would consider both the chance of success and the potential return if it succeeded. Less uncertainty and a larger market together could make the investment more interesting.
I used an example where the chance became three times greater and opportunities four or five times greater. It illustrated the argument, not a calculated valuation or actual probability for Autobutler.
So the next investor could not necessarily expect the same ownership for the money as the first. But it depended on what the company achieved and what the parties agreed.
The danger was the next portion not arriving
Raising a little at a time also involved a dangerous game. Could you get the next portion when needed?
I imagined a company offered 50 million for half but choosing to raise only 25 million for a quarter. If things developed well, that could be a good decision.
But what if the first money was spent, a couple of new countries failed or the product let you down? You might need money you previously had the opportunity to take.
Signalling trouble and a real need for capital could strengthen investors’ negotiating position. I outlined the next amount perhaps costing a far bigger stake, or only getting a smaller amount for the same ownership.
The figures varied in my examples. What mattered was the changed situation: Being forced to raise money at a bad time could be expensive.
An acquaintance advised me to have a buffer
I shared advice from a good acquaintance: If I raised capital, raise plenty, perhaps twice what I expected to need.
Not to spend everything, but because talking to investors was easier while the company was advancing and interesting. In a downturn, money could become more expensive or harder to obtain.
His thinking was to have something for a rainy day. I also mentioned concern that a bank might close the purse strings and investors demand a bigger stake precisely when help was needed.
It was advice I included in my thinking, not a finished recipe for how much every company should raise.
I was considering Dinero’s next step myself
The area also interested me because I expected Dinero to need money eventually. So I wanted to explore the capital market.
I did not yet know how much or how much ownership I would give up. I promised to share more when we progressed.
I was optimistic. In my assessment, we had both a concept users liked and a business developing positively in users and revenue. So I hoped we could raise a good amount for a relatively small stake.
But I also ended with uncertainty: Who knew? Those were my expectations in July 2014, before knowing the outcome of a future funding process.
Capital for a startup at different stages
I distinguished between having an idea, demonstrating the concept and demonstrating a business. An investor needed to assess different uncertainties at each stage.
My point was that you could give up a large part of the company by raising money very early. The amount alone was not what mattered.
The next funding round required something to show
I discussed using the money to progress and meet expectations you had created. If developments were weaker than expected, the next negotiation could be harder.
I mentioned friends, family and other investors, using Autobutler as an example. Figures about its capital and ownership were rumours and my guesses, not verified information.
How much breathing room was needed?
I shared a friend’s advice to raise enough for a buffer. We also discussed Dinero’s possibilities, but I had no final plan for amounts or stakes.
I said myself I was no expert. The video contains my thoughts from 2014 and does not describe current investment terms, a particular valuation or a sure route to the next round.
You can also find my experiences of life as an entrepreneur in Iværksætter til jeg dør.
Also read about Agera’s plans to build businesses abroad.
Historical Dinero reference from 2014: The original campaign link now leads to Dinero’s current website.