SME Funding: Slowing Funding Means Better Choices for Startups

Venture capital (VC) funding has always been considered the only way for a business to achieve real success. While there were of course companies that broke that mould, for the most part that was the general opinion. However, as the global downturn in venture capital funding begins, startups are being forced to look elsewhere, and that’s not necessarily a bad thing.

Mindaugas Mikalajunas, CEO of SME Finance, a rising fintech star in the Baltics. Since its creation in 2016, the company has financed invoices worth more than 800 million euros, works with insurance companies such as Coface, Euler Hermes and the Lithuanian Business Support Agency Invega.

He has 13 years of experience in finance, including eight years of project management (CRM) in a Scandinavian bank, followed by a position as CEO and member of the board of directors (incl. CC) in SME finance. He has published a few articles and comments in several news media in the Baltic States.

Talk to Fintech TimeMikalajūnas explains that as venture capital funds tighten, European startups are opening their eyes to more suitable funding alternatives.

Mindaugas Mikalajūnas, CEO of SME Finance,

Tiger Globalthe loss of 17 billion dollars, reported in May, was certainly catchy. But it won’t be the only tech VC to maintain a negative asset sheet for now and tighten its loan book.

It’s far from a rout, but government-initiated credit restrictions mean that global venture capital funding in May 2022 has fallen again to $39 billion, according Crunchbasethe lowest level since November 2020 and well below the $70 billion peak in November 2021.

As a result, European startups looking for new funding need to take a closer look at their options. What they discover is that the starry-eyed VC option may not have been the right path after all.

Instead, they are taking a closer look at the many new avenues now available to them to obtain debt financing. These generally involve less risk, less intrusive behavior on the part of lenders and serve to encourage more disciplined business practices.

A striking glimpse of the obvious

If anything needs explaining here, it’s the status quo. Why were the founders so eager to donate equity when they didn’t need it? “Founders seek out venture capital funding as if it’s the answer to all their prayers and the only way to scale a business,” said james Routledgefounder of sanctus and author of mental health at work.

Despite all the dire stories about the relentless demands of VCs and the widely held understanding that they take up to 85% of available equity before an IPO occurs, founders have remained stubbornly blind to the pitfalls of the VC model. Even the discovery that venture capitalists’ revenues come primarily, not from successful IPOs, but from the two percent annual fee on committed capital that they charge their investorsdoesn’t seem to put them off.

Part of the answer to the fixation was the sheer availability of funds. Crunchbase says global venture capital investment in 2021 totaled $643 billion, up from $335 billion in 2020, an increase of 92%. With that amount of money being handed out, perhaps the criteria weren’t as strict as they could have been and the funding rounds were bigger than they should have been. It was a heady mix that many founders couldn’t resist.

And VCs have sued companies at increasingly earlier stages. A startup that broke the venture capital trap was based in Stockholm planhat. “We have investors who have been contacting us since very early on. We thought we were working under the radar, but it’s crazy how they find companies at such an early stage,” the co-founder said. Kaveh Rostamportalk to Thames.

But many founders were flattered by the rock star attention they anticipated — and often received — if they pulled off the pitch rounds. And once they were on the venture capital funding treadmill, it was nearly impossible to get out.

What they discovered was that the one-size-fits-all approach to venture capital funding did not suit many, perhaps most. We regularly come across startups that have felt pressured by VCs to take on funding well beyond their current needs and give up excessive equity.

Initially, these founders tend to simply assume that being a startup means getting venture capital. But the more they think about it and research the options, the more they discover that there are more appropriate ways to meet their working capital needs.

Many alternatives to venture capital financing

The obsession with VC has always been curious. If you’re not raising equity and getting started instead, there are plenty of options to choose from in Europe, including raising venture capital one day.

More appropriate availability of working capital through revenue-based financing (RBF) and tailor-made factoring, lending and leasing packages has increased EU companies’ access to finance, their allowing them to grow faster. Adequate working capital allows them to establish their presence in the market, to be more flexible, to acquire greater bargaining power with suppliers and partners, to manage their operations more smoothly and to obtain insurance against the challenges startups face in their early stages.

Did the founders confuse their needs? Did they really need that much equity or just smaller working capital? In my opinion, SaaS founders would be better off if they could secure future revenue. With RBF, if revenue slows, so do refunds. The underlying technology also allows founders to get funding quickly and without having to travel to another pitch or meeting. It also ensures that the founders remain in control during times of uncertainty.

Credit crunches exist to eliminate

And having too much money on the table encourages bad habits. When a company raises equity, they expect it to take 18 to 24 months. The money remains in the bank account all this time: the reserve money which remains there without generating anything. It just leads to inefficiency because the company feels compelled to spend it or, worse, compelled to buy bad assets. As many startups that have overstretched are now discovering, there is a natural limit to how quickly you can deploy effectively or how many people you can effectively hire.

The point of central bank-induced tightening is to make people think twice about the debt they are taking on. In the white-hot world of tech startups, the drug seems to be working. Founders are looking for and finding ways to finance their business that are much more suited to their needs.