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Startup Funding Overview

This is a very brief and incomplete introduction to startup funding in general, and in Sweden in particular. In order to keep this overview pretty short, I’ve only focused on a few aspects of funding a startup, in particular different financing instruments for seed stage startups.

Very roughly, an archetypal company’s life can be divided into five stages:

What to do Funding options
1. Getting
started
Assemble a founding team. Build an MVP that users love.

Usable documents:

“Soft money”:

  • Don’t raise money
  • Grants or soft loans
  • Friends and family
  • CSN
2. Proof
of concept
Recruit key people. Generate great metrics. Prove a repeatable business.

Usable documents:

“Angel round”:

  • Angel investors
  • Grants or soft loans
  • Nano funds
3. Product
market fit
Whatever you didn’t achieve in previous phase, but now with even better metrics and more revenue. “Seed round”:

  • Angel investors
  • Micro funds
  • Family offices
4. Scaling Hire people and grow even faster. In later stages, there vill be more focus on profitability. Level up. “Series A, B, C…”:

  • VC funds
  • Private equity
  • Family offices
  • Venture debt
5. IPO Maintain growth while increasing margins. Build shareholder value. “Public”:

  • Public markets
  • Bank loans

I’ll discuss the five stages in slightly more detail below.

1. Getting started

You start with an idea and possibly one or a few co-founders. If you don’t have co-founders already, find some! It’s much harder building a business by yourself than with strong co-founders. Make sure that you complement each other in background, interests and skills. Don’t forget to sign a shareholders’ agreement, e.g. StartupTools Founders’ agreement.

It’s very hard to get funding from investors when you only have an idea, but it may be possible to get some grants or soft loans from public money, like Vinnova and Almi. See Joseph Michael’s great summary at beforetheangel.com. Other possible solutions: living off personal savings, consulting/studying in parallel to building the company, asking friends and family for some spare money etc., in which case you may want to use WISE. Also read Paul Graham’s old but still valid How to Fund a Startup.

If you are a seasoned entrepreneur with a good track record, you may even be able to raise money from investors, but it’s rare if you only have an idea. And, to be honest, if your track record is that great, you probably don’t need external money or want any dilution this early.

You goal in this phase is to build a minimum viable product (MVP) and reach a proof of concept so you have something to show if you want to raise money from investors.

Homework: Watch lessons 1-8 from Y Combinator’s excellent How To Start a Startup. And take a look at this infographic on how funding works.

2. Proof of concept

When you have reached a proof of concept and can show that you have users who love the MVP, you’re in a better position to raise an angel round of a few million SEK, if you need to and if you want to. There are tons of stuff written on the strategies and tactics about raising money from early-stage investors, e.g. by Hampus Jakobsson, Eliot Peper and the trio Andreessen, Conway and Conrad. I won’t repeat what they said, but summarize the key learnings:

Assuming that you get to the point when some people want to invest in your company, there are a few options on how to structure it:

Share issue Convertible loan WISE
What Create new shares and sell to investors. The “normal” way. Company borrows money from investor. Converts to shares in next share issue. Investor buys warrants from company. Convert to shares in next share issue. “A Swedish Safe.” Read more.
Pros Everyone is aligned. No surprises later when shareholders’ agreement shall be negotiated. Less paperwork. Faster process. Same as convertible note + counts as equity.
Cons More paperwork. Can be more expensive in terms of legal fees and due diligence. Need to negotiate valuation and terms. Need to negotiate a discount and cap. Creates debt in the balance sheet. Founders and investors may get different incentives. Similar to convertible loan, but creates no debt.
Docs Term sheet, Subscription agreement and Shareholders’ agreement Not published. In 90% of cases, I recommend WISE instead. WISE – a Swedish Safe

No matter what financing instrument you choose, make sure to keep things simple. And don’t get too diluted.

With the investors on board, you want to prove that you have a strong product market fit and that you’re ready for scaling up. To do this you probably have to make several key recruitments, generate metrics that look promising and show that you have a repeatable business. Then VC funds may be interested in investing.

3. Product market fit

If you’re one of the few startups to can demonstrate a strong product market fit with only one angel round, consider yourselves lucky. In this case, you may be able to skip this stage completely and move directly to the scaling phase.

However, it’s very rare that startups go all the way from one angel round to a big VC fund financed series A round (typically 40+ MSEK). Most companies need to do one round in between, sometimes referred to as a seed round. The pure goal for this round is to take you to the series A. Usual round sizes are 7-20 MSEK. This is usually too early for the big VC funds, but micro funds can invest, as well as angels and other investor collectives.

You basically want to achieve the same things as you tried to in the previous stage, but now with even higher expectations, since you’ve had more time and much more money to spend getting there. It depends a little on your business model and growth engine, but most likely you need to start generating proper revenue in this phase.

4. Scaling

Now, you know who your best target groups are, you know how to reach them in a profitable way (unit economics), you have made several key recruitments but simply don’t have enough cash to invest in building team, marketing and/or sales. In other words, you’ve built a car but can’t afford fuel. You turn to bigger investors.

If you ever reach this stage, you’re among the few percent of founders to ever take their startup this far. But beware, raising VC money is no goal, but it’s sometimes a necessary means. Having a car and filling it with fuel is no guarantee for winning the race.

Most of the companies that go really far will raise more than one round to fuel scaling. The first round is called series A, followed by series B etc. For example, Delivery Hero raised series H, and private equity before going public.

After a while, you may want to list your business on a regulated market to let early shareholders more easily sell their stock, or to raise more capital from the public.

5. IPO

This is when you list the company on a public stock exchange to make the shares liquid and let all shareholders and the public sell and buy shares in the company. If you need more funding here, you may borrow money from or make share issues to the public stock market.

/Erik Byrenius

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