Three ways Europe’s startup financing is maturing into a new type of capital market

It’s been a boom year for startup financing in Europe, which is great news because the world needs innovative startups to take on the big challenges it's facing, from pandemic recovery to climate change. 

But what I’m really excited about is how much the world of startup finance has matured this year. Founders now have an even wider ranging of options than ever before about how they get, manage and use capital within their businesses. That’s great because more options means more flexibility, and that means a wider range of startups will be given the financial tools to succeed.

Startups with recurring revenues are only just beginning to realise the real value of their earnings, and are starting to adopt the range of financial products available to them. They’re getting smart on how to make their money work harder - you don’t have to use equity for almost everything, and then a credit card for expenses anymore.

Debt funding is on the rise but the European market is still finding its feet

Debt financing has soared in popularity this year. Founders are getting more comfortable with tapping into credit lines to fund their growth, understanding that you don’t always have to give up equity to grow. It also takes the pressure off founders who know they have a great business, but not necessarily one that will be able to fit a VC’s business model.

There’s three clear advantages for startups we’ve seen using non-dilutive financing:

• Decisions are nearly immediate which can provide certainty for startups

• Founders can spend more time on their business, less time on pitching

• Startups do not have to adapt their business model or approach to secure funding

Ultimately, this shows the development of the entire funding ecosystem - ensuring that Europe’s startups have access to cash when they need it, on terms that work for their stage of growth. 

When I started in venture 5 years ago, venture debt was almost non-existent. However, while it has been growing quickly since, it is still very far behind the US, indicating that there’s a lot of room to grow in this market.

In Europe, around 5% of capital raised in 2020  was through venture debt (vs 95% equity). That same number in 2015 was 2%. However, in the US, around 16-20% of capital raised in 2020 was venture debt.

This is partly due to the fact that the US startup ecosystem is much older, with a higher prevalence of repeat founders. Repeat founders in Europe are interestingly much more positive to venture debt and non-dilutive financing than first time founders, so the European market is still finding its feet.

Better capital management 

This year has also seen a better development of cash flow management products for businesses. Pay later products are helping startups to spread the costs of large expenses and investments, while here at Capchase we have been launching innovative new products, like Capchase Earn, which allows founders to park their funds into a Capchase account and earn founders 3% interest on their funds. 

This is perfect for companies who are bringing in large amounts of capital that they don’t plan on deploying immediately - if a company is raising money to last them for 18 to 24 months, they’re selling a big chunk of the company now. If you don’t put that to work you’ll have a tonne of spare cash that’s sitting there not generating anything. And that’s just bad business.

A more sophisticated ecosystem that makes equity work harder

What we’ve really seen this year is better alternatives to VC equity coming to the market. They’re not designed to replace VC in most instances, but what they do is give startups a better range of tools for the job they’re faced with - growing a business. 

In general, as the VC market has become more competitive, through a significant influx of capital and new players, we’ve seen an increasing founder friendliness and improved terms from investors. There are still, however, risks associated with taking on external investors that many first-time founders do not realize. They are mostly concerned with how they will behave if things go south (or just slower-than-expected upwards).

Giving away equity is a big decision. VCs bring with them experience, networks and vision - but it’s also not always the only tool to consider when you’re just looking to make some operating investments for example. 

At the end of the day, how you finance your startup is always going to be one of the most important decisions a founder can make. The great news is that founders have more options available at the end of 2021 than they did at the beginning. For those of us in the European technology sector, that means more founders, and more great startups.