RTC #1: Capital financing is a journey and connect the dots

In today’s issue:

• Road-To-Capital: There are 3 dimensions defining your journey

• Full-time CFO: Find out when it is the right time to hire a full-time CFO 

• Investor gems: European lower mid-market lender of the decade

• Infarm raised $500m…and then it all but disappeared

Capital financing along the company life cycle

The ‘Road-To-Capital’ is unique for each company, for each founder and entrepreneur defined by individual circumstances and decisions. What stays the same for all though are the dimensions and parameters as the framework for the path each company takes.

Let us have a look at what these are!

Structure is also great, so let’s start with a simple summary of the key dimensions defining the journey that we want to cover today 👇

• Company life cycle vs external factors

• Equity vs Debt

• Private vs Public Markets

I. Dimension: Company life cycle vs external factors

Both the company life cycle and external factors determine financing choices.

👉 Company life cycle: Capital financing options go hand-in-hand with a company's maturity and growth

• Seed funding breathes life into ideas

• The company enters the market and begins to grow, larger equity funding rounds and debt instruments provide the necessary fuel for expansion and scaling operations

• Finally, approaching more sophisticated instruments and public markets

👉 External (market) environment: Throughout this entire journey, the external market environment plays a critical role in all stages in shaping and changing the availability and attractiveness of different financing options, having a great impact on the company's strategic decisions at each stage (welcome to the capital raising bear market in 2023 🐻).

II. Dimension: Equity / Debt

Equity and debt are the two primary and principal categories, blending to form the full spectrum of funding options.

👉 With equity funding you are selling ownership in the company bringing in long-term partners vested in the collective success This means that they will have a right to a portion of the company's profits and losses, and they may also have voting rights.

👉 Debt funding means that you are borrowing money from a lender (without giving up ownership), such as a bank or a private capital provider. There is typically an interest charged on the loan, and it needs to be repaid according to a specific schedule. Debt financing is a form of liability, controlled by so-called “financial covenants”, which means that it is an obligation that the company owes.

But there are also less clearly defined instruments like (public) grants, convertible notes, perpetual (subordinated) loans or redeemable preference shares, and (duh…surprise 🙂) many more….

(But do not worry, we got you covered and will discuss and explain in simple words the different capital types in more detail in future issues💡😊)

III. Dimension: Private vs Public Markets

👉 In private markets, companies raise capital through individual investors or private firms such as venture capitalists, private equity firms, or hedge funds (equity and debt). These markets offer more control and confidentiality for companies and are subject to fewer regulatory requirements. However, they typically have limitations in terms of broader capital access and less liquidity (you often need to have brokers or advisors to facilitate the process - except for the early stage: founders’ job!).

👉 Public markets are more sophisticated and therefore mostly entered at a later stage of the company. The most known way is the IPO (Initial Public Offering) to issue equity at a stock exchange and have it traded there. Debt (such as bonds) can also be offered to the general public, but most corporate bonds are rather traded over-the-counter (OTC). Public markets are much bigger and increase access to a larger pool of capital and improve liquidity, but they require adherence to stringent regulatory standards and regular, detailed financial disclosures. Companies in public markets are under constant scrutiny from investors and analysts, impacting both their equity and debt market activities.

Deal Highlights 2023 (each type)

See below some of the largest transactions across company stages in 2023 for further insights and illustration of the differences between them 👇👇👇

IPO: Arm, the Chip Designer, Raises $4.87 Billion in the Year’s Largest IPO

(Term) Loan: Hub raises $6.9B in debt refinancing move

Bond issue: Pfizer borrows $31 billion in mega bond deal

PE Sale: Subway Announces Sale to Roark Capital for $9.55B

PE: Stripe now valued at $50B following $6.5B Series I raise

VC Deal: Geely truck unit, Farizon, raises $600 million in funding round

Business Angel: Hydrogen Vehicle Systems raised £30m of angel funding from Mohsin Issa and Zuber Issa

🚨 But now...let’s hear from the expert and his insights on capital financing as a journey, learnings from one of the most prominent deals in Germany in 2022, and when (if) to hire a CFO.

Sneak peek: hiring no CFO is the wrong answer 🤪

🔥💬 Let’s dive right in…with Stephan Garabet

👉 Road-To-Capital as a Journey:

RTC: “In terms of the respective approach to capital financing, what did you experience as the key difference between a fast-growing scale-up and a more mature industrial corporate?”

Stephan:

• I think the key difference is the overall access to capital.

• As a listed, profitable, industrial corporate with a rating, you have access to a much broader variety of funding and at much cheaper terms.

• As a fast-growing scale-up you are most likely not bankable (yet) ie the focus is on growth in the beginning stages as opposed to profit and cash flow.

• Hence, very likely you can only access equity financing from investors who have the appropriate risk mandate.

👉 Series D Financing Insights:

RTC: "Could you briefly share key strategies or challenges you faced in securing the Series D financing - were there any unique success factors?”

Stephan:

• Sunfire's approach to its Series D financing had to be a very broad one ie speaking with a lot of different investors from different areas (ie VC, PE, SWFs, Infrastructure, Corporates, etc) because there was no 100% fit with any one particular investor group and yet everybody was keen to explore a clean-tech such as Sunfire

• The key challenge was of course asking for a lot of money (€150m+) for the scale-up of a technology with very little commercial track record and at the time barely any meaningful order backlog. Not many investors have the mandate for such an investment.

👉 Grant vs. Equity Financing:

RTC: "Where do you see the key difference in terms of approach and success factors comparing government grants and equity financing?"

Stephan:

• The emphasis of the narrative is different. Governments (federal or regional) want to understand what you bring to the table in terms of critical technology and what economic impact you can create eg in terms of the number of jobs you can potentially create.

• You also need to explain why you need government grants as financing and point to the difficulty of raising financing elsewhere.

• Equity investors are more focused on the growth story ie why you think you will win.

👉 CFO Function:

RTC: "At what stage do you think it makes most sense for a scale-up / company to implement a separate and internal CFO function? And what are potential signs that a company is ready for this transition?”

Stephan:

• Irrespective of what stage you are in, you should keep your financials in order.

• In the beginning, the finance tasks are mostly centered on proper bookkeeping and ensuring timely and accurate reporting of monthly and annual financials.

• As your business grows and with that its complexity and number of stakeholders finance needs to evolve, too, from a mere bookkeeping function to a proper strategic and forward-looking business partner.

• It also depends on how involved the rest of the management/founders are in financial matters. If they are very involved you may be fine just having a very competent accountant/finance director for the time being. If they are more hands-off then you need a competent finance leader earlier on.

• If you are lucky, you hire a very talented and competent finance director early on who does the operational groundwork in the earlier phases of the business and who can evolve into a proper CFO when the time is right.

💎 Investor Gems

Grow your outreach / investor list:

👀 What I found useful to read this week

This was Issue #1 - I hope you liked it and that it brought you a step closer to connecting the first dots.

Next week you will meet “the Mother of Venture Capital”, find out about the (secret) success metric for a start-up’s success post Series A, and much more…

See you next Tuesday!

Cheers,
Stephan 👋

Issue #1 | 19 December 2023

P.S: Thank you for your valuable feedback – if you loved this issue, help us grow our community by spreading the word and inviting others to join us on the 'Road-to-Capital' journey 🙏👇