Agile Fundraising: The end of 'feast or famine' finances

When raising investment, sometimes the process can feel somewhat ‘stop/start’. We’ve all had that moment between rounds where the unexpected happens, or something changes and you realise you need more money than you initially thought, but the traditional routes to funding are too slow to keep up with the demands of the fast-paced start-up world.

That’s why we at FounderCatalyst are embracing the new world of Agile Funding and are launching a new feature to help start-ups take advantage of this new approach to fundraising. In this article we explore how and why the funding world is changing, and how we can help you make the most of it.

The slow reality of traditional funding rounds

Traditional funding rounds take place every 12-18 months, and the preparation can be both time and cost intensive, distracting founders from delivering their vision for anything from 3-6 months. The process involves finding, securing and coordinating investors, negotiating deal terms, and (finally) getting everyone to sign the documents. But crucially, it also means having an accurate idea of exactly how much you’ll need to get from round to round to ensure you have enough money hit every milestone in between.

This increasingly out of date approach creates a few problems, not least that one day could be feast, but very easily the next could be famine. While, of course, you could potentially do a second round, this creates lots of paperwork: pre-emption process, shareholder resolutions and possibly consents. Lots of paperwork + herding cats = delays to a funding round, ‘investor attrition’ and sometimes even the collapse of the round. The result of which, for some, could mean running out of cash entirely before they raise again, leaving them at the end of the road.

The beauty of a start-up is that they are all about being agile – it’s the reactive, exciting, entrepreneurial spirit that makes us all want to be part of one. Every element of a start-up moves quickly: product development, marketing, hiring, customer acquisition approaches are all agile. So, it’s always been a curious idea that funding cycles aren’t.

The good news is, that’s changing, and the traditional ‘feast and famine’ approach is fast becoming a thing of the past. In its place, a new world of agile funding is set to change the way start-ups finance.

The fast future of funding is Agile

Agile Funding means that rather than having to get all of your investors lined up at one point (which risks investor attrition, where people get bored and find something else to do with the cash) you can now take the investment over a period.

This gives you more freedom to fundraise your way and at your own pace, more flexibility to take advantage of opportunities as they arise and are less time intensive, so you can stay focused on growing your business and realising your vision.

So, what is the process? Here’s a quick outline of the new way of doing things:

1. Optionally, use an Advance Subscription Agreement (ASA) before a funding round - find out more about how we can help you with a free-to-download ASA...Though also read our thoughts on the pros and cons of ASAs in general.
2. Complete a normal funding round (sometimes known as a ‘priced round’) and close once you have a few investors committed.
3. Take advantage of our Additional New Shares feature to continue to raise once the round has closed, without having a mountain of paperwork to complete. This is called a ‘rolling close’, a fundraising structure that is not limited by a predetermined value and allows a company to receive investments on an ongoing basis. After an initial investment closing, additional investors are allowed to invest in the same round with the same terms, generally within a 6-month window, but this isn’t set in stone.
4. Then, optionally, use an ASA before the next funding round.
5. Rinse and repeat!

Protecting investors whilst speeding up investment

By using a simple adherence agreement for each investor, we remove the normal admin associated with a full priced round, as each founder, investor and shareholder in the company authorises the issue of agile shares, with certain limitations (more on this below) and waves a number of admin hoops: there is no need for a shareholder resolution to allot new shares, or a pre-emption process, or any investor consents.

How are existing shareholders / investors rights protected? Well, we restrict the share price, maximum dilution and agile fundraising timescales as follows:

1. The share price during an agile round is agreed at a floor no less than that used in the previous funding round. Investors can be certain that the agile shares won't be sold at a price cheaper than they paid;
2. The number of shares that can be offered are capped. Investors can be certain that they won't be diluted more than a certain percentage in the agile round.
3. The timescale over which the agile round can run can be defined, to ensure that the founder can't keep raising at the same price two years later, where the share price should have increased significantly.

If the founders wants to raise more, at a lower price or over an extended period then they need to go back to investors and shareholders for authorisation.

A Case Study: Hunch

Alexander Wall of @hunch is a man of few words…But those few words are glowing about our Agile Investment funding round.

And what’s not to love? Rather than having to do ‘big lumpy’ rounds, where you have to get all investors to sign up at the same time (risking investor attrition if the timescales slip) you simply send as many investment offers as you like, whenever you like and investors can sign a single document and then transfer the cash whenever suits them. It’s that simple.

And because your existing shareholders and investors have already approved the agile share issue (covering a certain number of shares, over a certain period at a minimum price per share) you don’t have to bother them (or wait for them) to go through a cumbersome pre-emption process, sign shareholder resolutions or give any consents.

Agile investment has allowed Hunch to issue an investment offer and close that offer within minutes rather than months in traditional funding rounds. So we agree with Alex, Agile very much is indeed “sliiiick!”

Summary

Our new Agile investment feature, not only helps enable you to effectively raise continually, up to the limits you have agreed, but it also helps you avoid prohibitive costs associated with the paperwork behind raising.

We have recently amended our defaults to allow founders to raise a further 20% in an agile fashion, though this can be increased or decreased as necessary.

FounderCatalyst is already the most cost-effective way of achieving a funding round – now we are the fastest and most cost-effective way of agile fundraising too.

What to find out more about Agile Fundraising? Let's talk.