Financing for startup survival: 9 lessons from the frontlines

In the beginning, it’s simpler: there are plenty of resources on how to launch your startup, and even though it's financially tough, the model is relatively easy to grasp.

But once your company is off the ground, after a few years and as funds start to dwindle, figuring out how to propel your company into its next growth stage is less clear. There are many paths to take, and the right one largely depends on your company's unique characteristics.

You need to hear from entrepreneurs who have been in your shoes, been presented with all the problems, and have come out the other side. Or, to talk to financial experts that have seen startups in similar positions a thousand times over.

That’s why we hosted a panel on the topic last week, discussing stories of fundraising, exiting, or becoming as lean as possible to reach profitability directly. There were many insights to come out of the talk with Anh-Tho Chong (co-founder of Lago, who just raised $22M), Axel Guidicelli (co-founder of Ulysse), and Martin Vielle (partner at Clipperton), and we’ve compiled some of the main ones below.

Thoughts on fundraising

1. Don’t get too confident

The strong market and Ulysse’s previous fundraising successes led Axel to believe, when he went into raising his Series A in May 2022, that it would be easy. The bull market was in full swing, and their Seed round a couple of years ago was successful. That’s why he didn’t think it would be a big deal to start the process with six months of cash left. But then the world crises started to kick off, the bear market set in, and fundraising was no longer an option. It’s very unlikely founders today would enter fundraising with the confidence Axel did in 2022 - the climate has humbled so many founders - but the learning remains just as important today: prepare. Prepare from a time perspective (start early), prepare for a worst case scenario (have a plan B), prepare your positioning (get your message crystal clear), prepare your relationships (get close to investors). Without a decent runway, if you don’t manage to raise funds, your back will be against the wall without many options ahead of you*.

* Except to become profitable if you still have time to turn it around: more on that later from Axel.

“I was lulled into a false sense of security, which is always a danger zone for a founder” - Axel

2. Give it 110%… but in the shortest timeframe possible

Founders tend not to love fundraising - they’d much rather be running their business. As a result, many decide to spread the process out - they do an hour here in there, interspersed with other work. This isn’t the approach Anh-Tho, co-founder of Lago, took. With an all-or-nothing mindset, she went to San Fransisco for two weeks and had back-to-back meetings, all day, every day. That way, she was fully focused, meeting investors in person, being more efficient, and also creating a feeling of exclusivity - she was only there for two weeks, so investors needed to see her then if they wanted in. And it worked: in the offers came, and they managed to raise a whopping $22M overall.

“Fundraising is the most stressful thing a founder can do - I much prefer to get it all out the way in one go. There are a lot of benefits to it in my opinion” - Anh-Tho

3. Before you give into exploding term sheets, take a breath

Like many VCs, one of the investors interested in Lago put a time limit on their offer. This isn’t necessarily bad, and founders shouldn’t turn their backs on exploding term sheets completely, but resist the panic. In Anh-Tho’s experience, if a VC truly wants to invest, they will still want to next week, despite the offer technically ‘expiring’ on Wednesday at 11pm. While they want to stop you talking with other investors, it’s important to honor your own process and see through the other meetings you have. It’s your company, and you need to do your homework to make sure you’re going with the investor that is best suited to your company. And if after all your meetings, it turns out to be the VC that offered an exploding time sheet - chances are, they will still be there at the end of it.

“The ‘harder you are to get’ in my experience, the more hellbent VCs are on investing in you” - Anh-Tho

Thoughts on becoming profitable

4. It’s scary, but high reward

Axel's shift toward profitability with Ulysse wasn't initially by choice but necessity when the fundraising landscape changed in 2022. But he says it’s the best thing that could have happened to them. Before this new reality set in, Axel and his tech co-founder were self-confessed non-financially-minded people - they didn’t pay great attention to how each euro was spent, or how to get the most out of each one. Once they decided to fast-track their path to profitability to stay in the game, this all changed.

“Our financial management is so much better than it was before. I’ve learned more about business this past year going down this avenue than I did in the entire three years before. I understand what it takes to create a successful company much better” - Axel

5. You have to be moderately ruthless

For Axel, it’s one of the hardest things about the profitability path. Unless you already have a very small and efficient team, scrutinizing every penny often means cutting down on headcount. Just like for many entrepreneurs that go through this, it was one of the toughest things Axel ever had to do as a founder. In one day, they let go two thirds of their workforce. It was huge, but on the advice of Ulysse’s investors — which Axel was glad to have in this predicament — the ruthlessness was necessary to avoid further redundancies in the future. They got it all done up front to put the rest of the team’s minds at rest, to motivate them moving forward.

“Our team hasn’t changed in the last year, and they are fundamental to Ulysse. We’re a very lean team, and every person plays a key role in the company’s running” - Axel

6. Profitability is a means, not the end

Profitability is not the final destination for a startup. Reaching this milestone is a strategic move that strengthens a company's position for future fundraising, which Axel is not closed off to in the future. Profitability demonstrates to investors that the startup has a viable business model and can generate sustainable revenue, opening doors to new funding opportunities aimed at expansion, innovation, or scaling operations in ways that were not previously possible.

“What happens when we achieve profitability? Honestly, I'll continue doing what I’m doing now, which is striving to scale up the business. I’m open to raising more funds. Our ambition hasn’t changed, it's just that our approach to reaching that goal is evolving” - Axel

Thoughts on exiting

7. Don’t build a company to sell it — but always be ready

Our panel agreed that selling it one day shouldn’t be the reason you build your company. Your heart won’t be in it, and to overcome the (many) challenges of entrepreneurship, that’s exactly where your heart needs to be.

“I believe that entrepreneurs who build companies with a clear exit in mind from day one are doomed for failure” - Anh-Tho

So, you shouldn’t obsess over selling your company — but according to Martin, partner at Clipperton, it's wise to build and grow your business in a way that keeps it attractive and sellable. Doing this is just good business sense, and keeps your company in check at every turn. Making sure it's appealing to potential buyers or investors keeps your expectations high, and prevents things from ever getting sloppy.

“Being exit-ready means having clean financials, and this should always be a goal” - Martin

8. Be open-minded

You might not want to sell yet, but taking a mental note of all of the people who have shown interest in your company is good practice - you never know when you might want to get back in contact. Even if wasn’t your goal, it could also transpire that upon closer inspection — depending on the market and many other factors — you find that it’s actually a deal worth considering. Adaptability and a willingness to explore different options can be crucial in finding the best path forward for your company.

“When an offer is right in front of you, it can be tempting to take - and depending on the context, it might not be a bad idea” - Martin

9. VCs aren’t the only way to finance your company

Once your company grows big enough, private equity and debt financing through a Leveraged Buyout (LBO) become options. This doesn't mean you have to sell your company outright. You can choose to exit or stay on board, with financial incentives either way.

To get the attention of private equity firms for an LBO, your company should be making at least €10 million in revenue. Some smaller private equity firms might consider tech companies with revenues starting at €5 million, but they are rare. The €10 million revenue mark is crucial not just for its psychological impact but because LBOs usually involve buying smaller competitors. Your company needs to be large enough to take on and integrate these acquisitions successfully.

Your company must be profitable to use debt for an acquisition. The recent exception to this rule is debt financing based solely on Annual Recurring Revenue (ARR), which has allowed some B2B SaaS companies that are only breaking even to undergo LBOs.

“At the €10 million revenue mark, there is enough room for a structured team and Comex. The financial best practices are there, and it’s a size that can start absorbing acquisitions” - Martin

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Deciding on the next step of your company’s financing journey is often a make-or-break moment, so consider your options wisely.

At Hexa Scale, we offer an alternative route for companies wanting to get back on the path to market leadership. We’re not a private equity firm, and we’re not a VC: instead, we act as a late co-founder, providing capital and hands-on involvement. Together, we’ll come up with a new strategic path and implement the necessary changes to create a new trajectory for your company.

To find out if Hexa Scale can help you, get in touch.