Be it Seed, Series A, or something further down the alphabet, everybody loves a funding round. For founders, each new injection of capital marks a further milestone on the growth journey. An opportunity to very publicly bank a large amount of cash while also talking to the press and analysts about the strategic plan for the next year or so. For their part, investors can also grab a moment in the sun, explaining their investment strategy, perhaps, or simply singing the praises of their chosen founders. And lurking in the background, journalists ask questions, take notes and file stories.
But according to Anthony Rose, the prominence given to milestone funding events can disguise the fact that businesses often need finance not in six or twelve months’ time but within a much shorter timeframe. In his view, founders should consider a more agile approach to raising capital, particularly in the current climate.
Rose – along with Laurent Laffy – is co-founder of Seedlegals, a UK tech platform set up in 2016 to provide startup businesses with an efficient and simple way of completing all the legal work associated with raising funds from equity investors. To date, the company has facilitated investments worth more than £1 billion and says it has closed 1 in 6 early-stage funding rounds in Britain.
But as Rose points out, while investment in UK startups is holding up, we are living through uncertain times in terms of both angel investors and VCs.
In the case of angels, he says investment levels are currently strong. “As an angel, if you have the capital, you love the business and think you can get an ROI, you will invest,” he says. But there is a caveat. Rising interest rates may tempt some angels simply to put their money in the bank. Others, if they have mortgages or other debts, may find they have less capital to invest.
Meanwhile, in the VC marketplace, falling valuations are hitting the ability of founders to raise capital. “If you are seeking to raise £1 million against a £5 million valuation, you might need half a million in revenue. If valuations fall you could find yourself raising against a £3 million valuation, so you either raise less or give away more equity,” says Rose.
Against this backdrop, Rose says it may make sense for some startup founders to raise cash “opportunistically,” rather than putting all their faith in the big funding round that comes around every year or eighteen months. He calls this agile funding.
Seed Fasts and Rolling Closes
But what does that mean in practice? Rose cites two examples. “Ahead of a first funding round you can raise money through a seed fast,” he says. “Or you could do a rolling close round.”
You could characterize a seed fast as a kind of bridge finance. One scenario would be a company working towards a funding event while being in need of a smaller amount of capital in the shorter term. Under a seed fast arrangement – similar to the US SAFE concept – an investor would agree to provide the capital against an offer of shares at an agreed date. At that point, a valuation would not be required.
An alternative is a rolling close. You agree on a funding round but build in the ability to top up the amount at a later date at the same or higher valuation. You can add investors when you find them,” says Rose.
This provides startups with flexibility but might also help them raise larger amounts of cash. Rose cites the example of a business securing equity finance ahead of the first official funding round. “You need some money in advance of a funding round. By using a seed fast, you can raise capital and also build traction before the milestone round.”
One obvious question is why would investors go down this road. Investing via a single funding round means that all the parties can agree on a valuation while also being aware of how much equity is changing hands at a fixed point in time. If however, a startup raises equity cash in between major funding rounds, it must surely make it more difficult to manage the investment process.
Rose says, there are reasons why investors might choose to put their financial weight behind agile investing. “Investors have found that as markets heat up, seed fasts provide a way to get a foot in the door faster,” he says.
But he acknowledges that the interests of investors must be part of the equation. “You have to build in checks, balances and protections,” he says. In practice that can mean incentivizing investment through discounts, putting a cap on valuations and placing a limit on the gap between the investment and the valuation.
Drip, drip, drip
But is there perhaps a reputational concern to address. In one version of an ideal world, a startup knows exactly how much cash it needs, raises it and doesn’t look back until the next funding round in 18 months’ time. Constant demands for cash might create an impression of a company that isn’t managing its finances well. Rose makes a distinction between this kind of drip finance and startups that are using the tools at their disposal to ensure they are sufficiently well funded to deliver on their goals. Seed fasts and rolling closes can be strategic tools, he argues.
In other words, Rose is suggesting that agility can become part of the corporate finance toolkit, with startups raising small amounts when needed without compromising the ability to also secure capital through milestone rounds. It has to be said, Seedlegals has some skin in the game. As Rose describes it, the company has productized the process of raising capital between major rounds so it a strategy that it is keen to promote.
Top-up rounds aren’t new but they can be complex to manage. Seedlegals says it has made the process easier by providing a platform through which the legal relationships can be managed and automated. As such, it is providing another option for founders in search of capital.