Financing: the current context between equity and debt with Leia Capital & Super Capital

Read the summary of the webinar organized by Silvr: "Financing: the current context between equity and debt". It brought together Clémence Lejeune (business angel, entrepreneur & co-founder of Leia Capital), Frédéric Baecke (partner at Super Capital and co-founder of Super Capital Leverage) and Pierre Youénou (CRO at Silvr).

The 3 speakers of this webinar discussed the state of financing in the current context, particularly between equity and debt. First, let's remember that in the financing environment, there are not only VCs, bank debt, or grants and investments from the BPI. It is in fact a financial fabric that must be balanced according to the size of the business, and the cost items it needs to address.

Find the replay of the webinar here. For the written summary, see below.

Who were the speakers of the day?

Clémence Lejeune: co-founder of Leia Capital and Sorella Care

Clémence Lejeune is both an entrepreneur and an investor. She co-founded the business angels fund Leia Capital , which invests in entrepreneurial projects founded or co-founded by women. Clémence Lejeune also co-founded Sorella Care: a startup dedicated to women's healthcare and to supporting women in their healthcare journey. She is therefore very familiar with the two aspects raised during the webinar, namely equity financing, which she recently experienced when she raised some equity, as well as non-dilutive financing with bank debt, which she also secured.

Frédéric Baecke: partner at Super Capital and co-founder of Super Capital Leverage

Frédéric Baecke is a partner at Super Capital and co-founder of Super Capital Leverage. Super Capital is a 360° financing group, which supports startups on both the equity and non-dilutive sides: from pre-seed to series A. The structure helps activate the right financing levers to take advantage of these multiple facets (public banking networks, debt funds, RBF players)... hence the 360°.

Pierre Youénou: CRO at Silvr, the startup that finances startups

Pierre Youénou is CRO(Chief Revenue Officer) at Silvr - the European leader in RBF and one of the top 10 fastest-growing startups in the LinkedIn Top Startups 2022 ranking. Silvr finances all digital entrepreneurs with a source of financing that is complementary to he more traditional types. Later in this article, we'll ask: why is Silvr's notion of time projection so important?

1: What is the market situation regarding debt and equity?

How are startups faring in this transitional ecosystem?

Clémence Lejeune starts with her experience. Since the beginning of the year as a business angel, she has dealt with judicial administrators (i.e. the people in charge of managing the cases of companies in difficulty: those who file for bankruptcy). She has observed a significant increase in these cases around May-June 2022. Why is this? Because the startups come forward very late, when their weak runway is only 2 to 3 months, which is not enough for investors to see clearly.

Expert advice: for startups, prevention is better than cure. It's better to come forward before it's too late to keep your options open.

The observation is similar for Frédéric Baecke. Since this same period, contacts with financial services have focused on moratoriums and receiverships, rather than on the construction of dilutive fund-raising cases backed by non-dilutive financing.

What is the state of the financial sector?

The conclusion is clear: the banks have already increased their rates. While this increase can be dizzying, "in hindsight, it is not such a bad thing, as rates were historically low", says Frédéric Baecke. It is therefore time to return to rates that are healthier for the economy.

In view of this changing economic context, margins are lower. From a financial point of view, the debt is increasing in value. Pierre Youénou reminds us that "cash has been exceptionally cheap over the last ten years, with the floodgates wide open in 2021". So we have to relearn that this money is going to be expensive again.

Expert advice: relearn the fact that "money is no longer free".

So valuation means dilution. The decline in valuations reflects the need for businesses to generate revenue, despite shrinking margins and rising costs (energy, supply, debt). This makes it more obvious to analyze the forecast - what the business is capable of achieving. This trend of anticipation and organization is indeed the raison d'être of Silvr and the alternative players in the banking market: to find scoring solutions that are oriented towards the commercial future of projects.

2: Have the financing criteria changed?

Financing criteria have not changed... But rates are getting tighter!

On the equity side, the criteria have not changed. For funds like Leia Capital, the business analysis remains the same. In particular, they take into account:

  • The team, its strengths and scope of expertise
  • Market size
  • The product, its stage of development and its relevance
  • The ability of the business to generate traction
  • And the ability to pivot at the right moment.

However, expectations for metrics are being raised.

The problem? Finding financing! To do so, the trend in the startup ecosystem is to organize around cash flow management, with new perspectives in business plans. Inflation on the pre-pandemic valuation has come down to more coherent levels. "We can no longer sprinkle a project, an idea, a business plan with glitter: we will look at the calculation of the margin and the operational metrics. So, we look at the same criteria, but with more attention given to short- and medium-term financing ambitions, as well as to the capacity to generate revenue.

What are the behaviors in the different financing schemes?

First and foremost, whether we are in an economic downturn or not, you need to diversify your financing sources. There is no order of priority. Pierre Youénou talks about his experience with clients financed by Silvr. As a general rule, nearly 45% of the businesses financed in a non-dilutive way with Silvr have raised equity. This dilution is completed by bank debt in 80% of cases via medium/long-term loans or via cash flow facilities (authorized overdraft), even though many entrepreneurs do not yet dare to take on debt even though their cash flow allows it.

So where do you start? Should we use one financing solution to activate another?

3: So how should startups adapt?

Let's start by weighing up what we are saying: you have to diversify your sources of financing, but also look at the relevance according to your needs and timing. The advice is then to manage the equity and the non-dilutive financing well, without getting behind!

Diversification of your financing sources

The perception of risk has changed, as we are relearning that cash has value. This cost translates into dilution for equity and a financial cost for debt. So, in this context of uncertainty, you have to keep, develop and mix a maximum of options, depending on the nature of the source. The main scenario is to say: bank debt and equity on medium/long-term cost items, the rest on short-term - notably with Silvr's RBF. No financing solution is better than the other, they are complementary.

Expert advice: avoid overdependence by diversifying your financial partners.

For Clémence Lejeune, business angels come before VCs. However, these two types of actors share a common point (that bank debt does not): the temporality of the return. VCs will look for scalable models to invest in long-term value capture: to better resell or exit the company. Other financiers may look for this same value, but with a more risk-based, long-term dividend strategy.

To convince business angels - who have the ambition to exit after a strong growth of the business - it is necessary to prepare its equity story with a longer-term vision over 4 to 5 years.

Verification of the case and the equity story

Before proceeding with any financing operations, it is necessary to foresee different financing scenarios, particularly by integrating your cash burn. The support from structures like Leia Capital and Super Capital is ideal. Thanks to them, it is possible to keep the visibility on the process from A to Z.

Expert advice: rely on your network (investors, advisors) to better assess the current situation.

So, well in advance, establish different scenarios in your forecasts. Use your peers, their vision and your entrepreneurial entourage to estimate how the situation is at a given moment. Super Capital and Leia Capital also intervene here by sharing their vast network, by putting you in contact and by supporting you in the management of your project, of your evolving steps, which are sometimes risky and complex. Don't lose sight of the fact that the eye of business angels becomes sharper with time and experience: take advantage of it!

Anticipate the timing of the various financing sources

The key word here is timing! More precisely, anticipation. Your project is going fast, but access to financing is not. So timing is essential: banks do not have the time to develop these partnerships at your pace, especially because of long procedures such as risk committees. They have to respect the order of things to allocate financing envelopes to entrepreneurs.

Expert advice: refine your forecasts and anticipate the costs involved.

To better manage dilutive and non-dilutive sources of financing, you need to model growth and its cash outlays accurately and consider all scenarios. Finally, to manage the activation of dilutive and non-dilutive sources as effectively as possible, refine your forecasts, anticipate the cost items addressed and manage your time, because access to financing remains time-consuming and tedious.

In short, prepare your business's financing by improving its cash flow through Silvr's solutions!

- Published
January 23, 2023
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