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How your financing strategy can make or break your startup

Augustin Celier
With 14 years in entrepreneurship, Augustin has founded four companies across various sectors, exiting three of them. Uptime, his latest venture, was VC-funded, raised €15 million, and employed 75 people. At Hexa Scale, Augustin aims to use his experience to help linear growth companies get back on the road to exponential growth.

The era of free-flowing money is over. The time when startups could easily jump from one financial round to the next has passed. Today, how you plan your startup’s funding is crucial—it can be the key to success or the reason for failure. Despite the tough climate, it’s not enough to just find investors; it's about finding the right ones and spending the money wisely.

As an entrepreneur, you’ll often face tough decisions, especially when funding is critical to your company’s survival. There are many traps to avoid at this time, and desperate decisions often lead to the worst outcomes.

In recent months, I’ve met with dozens of entrepreneurs, and some patterns of funding mistakes that kill the company just keep repeating themselves. In this article, I will talk about five frequent traps and how to avoid them.

For advice on the best financing strategies and how to apply them, join our event next Thursday. I will be speaking alongside Axel Guidicelli (co-founder & CEO of Ulysse), Anh-Tho Chuong (co-founder & CEO at Lago), and Martin Vielle (partner at Clipperton), sharing our first-hand experience in startup funding.

5 fundraising approaches to avoid

1. Layering up business angels when you can’t find VCs

  • Classic story: You’ve successfully raised money from Business Angels (BAs) but encounter difficulties when trying to raise capital from institutional investors, for various reasons. In an attempt to keep the momentum, you continue to accumulate funding through successive rounds from existing investors, or, in some instances, you resort to using your own funds.
  • The Pitfall: This strategy often reflects a deeper market signal; if the broader investment community is not willing to finance your venture, it typically indicates a mismatch between your startup's trajectory and the expectations of VC-funded growth. Persisting with this approach can lead to significant dilution of ownership and an awful cap table, without resolving the fundamental challenge of attracting enough funding for scaling effectively.
  • The Solution: It's crucial for founders to critically assess the growth model of their startup early on. This involves deciding whether their business is better suited for a model that does not rely on VC funding. Only a tiny fraction of business models are actually adapted to VC funding. Bootstrapping or early profitability might be better suited to your startup, meaning there is no sense in diluting yourself; or maybe the market isn’t what you expected, and the asset you built could be sold through a strategic partnership.

2. ‘Settling’ for investors who aren’t a good match

  • Classic Story: You’ve worked on a funding round for months, all top-tier investors have declined, you’re running out of cash, and a Tier-3 investor or an amateur BA is interested. You end up accepting money from unprofessional investors, or investors with a vastly different perspective on your company's direction.
  • The Pitfall: It’s like marrying someone you have no connection with. It can go only wrong. At best, the unprofessional investors will be passive — a trait common among top-tier guys. At worst, they will impose awful funding terms and steer you actively in all the wrong directions. How many times have we heard the story of the board pushing for tons of hires just before asking to fire 30% of your team months later? Of boards vetoing non-dilutive financing from public loans? Of toxic business angels trying to micro-manage the CEO? You can kill your startup that way, and unfortunately, many have.
  • The Solution: No money is better than bad money. Period.

3. Relying on funds, instead of healthy unit metrics, to grow

  • Classic Story: You’ve reached a certain level of PMF. Your unit metrics are OK but not great (CAC, Payback, Gross margin, NRR). You’ve raised a nice new round. You can go down two paths: A- spend time on fine-tuning your model to significantly improve your unit metrics before scaling, or B- start scaling immediately. Like everyone else around you, you take door B, hoping your unit metrics will get better.
  • The Pitfall: Without addressing the performance of your growth model, you risk the life of your startup. Quite often, while growing your top line aggressively, your unit metrics will not improve—they will get worse. The core issue is that you might end up much further down the road with a big company, unclear on how you actually create value. You then find yourself in the dangerous cycle of needing to raise more funds to fuel further growth, the VC-Ponzi scheme.
  • The Solution: The current downturn is bringing everyone back to reality. However, what holds true now was true when interest rates were negative and will remain true in the future: a company will only survive and thrive in the long term if its value-creation engine is sound. You're always better off pausing and experiencing slower growth to recalibrate your business model, acquisition, and retention before accelerating again.

4. Burning cash and relying too heavily on the next round

  • Classic Story: A startup successfully closes a funding round and, with newfound financial resources, embarks on aggressive expansion. This includes hiring top talent, entering new markets, and ramping up marketing. The expectation is that within 18-24 months, the startup will have grown significantly, justifying and facilitating another larger round of funding.
  • The Pitfall: The new funding round doesn't materialize for whatever reason—COVID, war, underperformance, or a competitor disrupting the market. So, you're forced to lay off staff and apply the brakes, a process that is both time-consuming and costly, especially in France. This situation could lead to the liquidation of your company.
  • The Solution: Paul Graham articulated this concept more effectively than anyone else in 2015: the necessity of adopting a "default alive" mentality. You must plan your growth and expenses to achieve self-sustainability within a foreseeable horizon. This approach allows you to raise funds at will, not for survival. As a result, you might secure a more advantageous funding round, with better valuation, size, terms, and interest from tier-1 investors. When you don't urgently need the money, VCs seem to find it hard to resist the opportunity to invest.

5. Raising too much pre-PMF, unless you have Capex

  • Classic Story: In the excitement of early success or a hot market, startups sometimes find themselves with the opportunity to raise more money than initially planned. Maybe your topic is ultra-trendy. Maybe a top investor is providing a strong signal and everybody wants in. What’s next? You raise much more than you need.
  • The Pitfall: You’ll spend tons of cash on useless stuff (fancy offices, remote location offsites…) and hiring (way) too big a team. You’ll lose agility and you’ll be slower to reach a strong Product-Market-Fit, if you ever reach it. Since you’ll have raised tons of cash, investor expectations will be much higher, while you might end up underdelivering.
  • The Solution: Focus entirely on iterating your product and go-to-market to reach PMF. Don’t get a false sense of security if you have too much money in the bank—stay laser-focused on your mission. (Of course, for startups with significant capital expenditures (CapEx) necessary for their business model - think Ynsect, Mistral, Zoï - this doesn’t apply).

Funding your startup properly is hard, but entrepreneurs often don’t see that suboptimal funding isn’t just suboptimal: it can break your company. The importance of getting it right cannot be overstated!

To find out the best financing strategies and how to apply them, don’t forget to sign up to our event next Thursday. See you there!