by Christian Rangen & Henrik Amstutz
A New Capital Landscape
Over the past 24 months, Strategy Tools has assisted accelerators, innovation agencies, and global founder teams in pivoting to a new funding strategy. Gone are the days of relying solely on equity financing. Today, the focus is on blended startup financing. But what is the role of accelerators in this shift, and how can your accelerator help founders succeed across the capital stack?
Eighteen months ago, startup founders were chasing equity investors, and accelerators were hosting mega-demo days. In today’s capital markets, where capital efficiency and profitability take precedence over future growth potential (with AI being an exception), startup founders need to pivot. They must adopt a blended financing structure where grants, debt, and revenue are equally important components of the financing mix.
Today, founders are expected to have the financial acumen, or the right team to support them, to understand various financing opportunities. This includes not only knowing what they are but also understanding their processes, requirements, expectations, and terms. Sifted, a subsidiary of the Financial Times reporting on Europe’s venture capital environment, recently published that European startups raised €47.3bn in equity, debt, and grant funding in the first half of 2024. A total of €18.7bn came from debt. For accelerators, this means the focus needs to be on educating founders on the available capital stack, additionally to traditional equity or convertible loans.
What is a Capital Stack?
The capital stack refers to the various sources of financing. Traditionally, founders and investors focused purely on equity financing (money for an ownership stake), or using convertible loans (or similar instruments).
The capital stack has not changed, but the relevance and use has. In 2024, c. 40% of financing in Europe came from debt – signaling a strong shift and perspective in the market. Today, the sources of proceeds can vary.
Consider that cash from revenues can be used for R&D or hiring or marketing, as well as signed commercial contracts can be used for invoice-based financing. Grants can be used to finance research or projects. All of these are non-dilutive, i.e., have no impact on the cap table which is equally beneficial to founders and investors, who both want to retain the highest stake in the company possible to maximize value.
In the “Our Capital Stack” Canvas, on the Y-Axis we cover the capital stack sources.
The capital stack refers to the hierarchy of financial claims that investors and lenders have on a company’s assets and income and the various sources of funding a company can have.
The most common sources of capital are equity (common vs preferred shares), debt financing (split into senior debt, mezzanine financing, project financing or more) and soft funding (including project based funding, grants, tax benefits, subsidies or more).
Each layer of the capital stack has different risk and return characteristics, influencing how and when investors get paid. Some, like soft funding, do not impact investors (no impact on the cap table) or credit-worthiness and are therefore an incredibly attractive method of raising capital. We should of course not forget any capital coming in from revenue or other existing contracts, like invoice-based financing.
As an accelerator, your entire team should be well versed in all of these capital sources and which would be most beneficial for your companies.
What is Blended Financing?
Blended financing involves combining different types of funding sources, such as equity, debt, grants, and revenue-based financing, to support a startup’s growth. This approach allows startups to optimize their capital structure, reduce dilution, and enhance financial flexibility.
Later on this article, we will cover three cases of how blended financing are used in some of the most successful European startups (based on amount capital raised).
Founders today need to understand how these asset classes work together and the benefits and drawbacks of each. They will look to accelerators or other members in the ecosystem to help educate them on potential alternatives, and what is most relevant for a climate-tech vs edtech vs infrastructure startup.
We really appreciate this article from our friends at CTVC, providing an insight from Key Frame Capital.
Infrastructure and Heavy Assets: Study Your FOAK
First-of-a-Kind (FOAK) projects often involve significant infrastructure and heavy asset investments. Understanding the unique challenges and opportunities associated with FOAK projects is crucial for structuring effective blended financing strategies. The example of Northvolt illustrates a FOAK solution as a battery plant of this size and complexity had never been built. Other examples include H2 Green Steel, Climeworks, or LanzaJet.
These projects are typically used for the development of their solution or product, demonstrating the use case on a larger scale prior to initial deployment but bear higher technical, market, and financial risks. Due to the capital-intensive nature of FOAKs, there is a “valley of death” where funding sources are limited between smaller venture capital tickets and larger debt sources (which require lower risk profiles and strong traction), which is why the importance of blended capital becomes relevant.
Governments should be considered for soft funding through grants or loans, project financing solutions through investment banks like the EIB, or equity financing from larger institutions or private equity funds.
For more insights on alternative climate asset classes, refer to this article. For more information on FOAKs, we highly recommend this article. Most recently (August 2024), the French company Ÿnsect will aim to raise a FOAK solution – read Sifted’s coverage here.
A New Landscape for Founders
Startup founders need to adapt to this evolving capital landscape. Key steps founders should take include:
- Diversifying funding sources: Explore grants, debt, and revenue-based financing alongside traditional equity.
- Prioritizing capital efficiency: Decide with existing and new investors whether to focus on scaling and raising funds until profitability or on achieving profitability and sustainable growth.
- Understanding investor expectations: Be aware of the different risk-return profiles across the capital stack.
- Building robust financial models: Demonstrate how blended financing can optimize the capital structure, considering interest payments or maturity dates for debt structures, and cap table impact for equity investments.
- Engaging with alternative investors: Develop relationships with lenders and grant providers.
Accelerators should feel comfortable with all of these topics amidst a dynamic environment and tough fundraising environment.
The canvas below offers a solid starting point for visualizing various funding streams and their interoperability.
Let’s explore how the Capital Stack canvas plays out through a few case studies:
In our previous Growth Strategy post – we introduced you to the fictional company VoltyngX – an electric vehicle battery repurposing start-up. We continue working with them on the Capital Stack canvas to see what their various capital sources could be going forward:
And here are a few cases from the real world:
Case Study A – Electra
Electra, a French electric vehicle charge point operator, has raised close to €600m since its founding in 2021. Today, the company employs around 200 people across eight countries in Europe, responsible for approximately 200 live stations representing more than 1,200 charge points. Their aim is to build 2,200 charging stations and more than 15,000 charge points in Europe, a capital-intensive endeavor.
Their seed round was led by Serena, raising €15m in June 2021, followed by a €160m Series A led by Eurazeo. In January 2024, the company raised a €304m Series B led by the Dutch pension fund manager PGGM, with participation from BPI France, Eurazeo, RIVE Private Investment, and SNCF. Between their Series A and B, the company also raised around €27m in debt financing from the French bank Credit Agricole.
Case Study B – Tibber
Tibber is a Norwegian smart energy management company providing energy-efficient solutions through a smart energy app. Tibber is currently active in Norway, Sweden, Germany, and the Netherlands, where users pay a monthly fee instead of a markup on electricity prices to promote a greener and more sustainable future. Tibber is considered a ‘soonicorn’ (soon to be a unicorn) with revenues above €2bn in 2023.
Since its founding in 2015, Tibber has actively funded its journey through five equity funding rounds: a SEK7m seed round, NOK15m venture round, $12m Series A, $30m Series B, and $90m Series C. Between these transactions, Tibber also raised significant amounts in soft funding (grants), including SEK3m from Sweden and NOK13.5m from Norway. Before their Series C, they also secured €35m in debt financing from Nordea.
The best-performing companies understand the value of a blended capital stack and how utilizing all financing opportunities available to them provides value to all shareholders.
Here, we mock up what we think it will look like if TIbber were to work on the Our Capital Stack canvas:
Case Study C – Northvolt
Northvolt’s ambition is to supply the automotive industry with electric vehicle batteries, produced in Europe. Over six years, the company has had more than 12 funding rounds from more than 61 investors raising more than €8.7bn.
Northvolt received early funding from Vinnova, Sweden’s Innovation Agency, the Swedish Energy Agency, StenaLine, ABB, and Climate KIC. Following this, the European Investment Bank provided over €50m in debt financing. Siemens invested €10m, and Vargas Holding and Vattenfall contributed €12.5m. Within two to three years, the European Investment Bank extended an additional €350m in debt financing to support the construction of their first factory. Simultaneously, Northvolt secured $1bn from VW, Goldman Sachs, BMW, IKEA, AMF, and others. By July 2020, the company raised €1.6bn in debt financing from a consortium of over 20 banks and €600m in venture financing from 11 investors. The funding journey continued with another €600m from VW and €2.8bn from 19 investors. This case highlights the complexity of today’s funding environment and the importance of understanding various funding sources.
A Changing Role for Accelerators
Accelerators must also evolve to support this new financing paradigm. Their importance in the ecosystem cannot be understated, but they need to shift their learning towards helping founders understand the new and blended capital stack. Crucial actions for accelerators include:
- Educating founders on blended financing: Provide training on various funding sources and their implications.
- Fostering connections with diverse investors: Build networks with debt providers, grant agencies, and revenue-based financiers.
- Redefining success metrics: Shift focus from just equity raised to overall capital efficiency and financial sustainability.
- Supporting financial planning: Assist startups in creating comprehensive financial strategies that leverage blended financing.
- Adapting demo days: Showcase startups’ ability to secure diverse funding sources and achieve profitability.
Below is Sifted’s calculation of the most active debt funding rounds in 2024 so far. As an accelerator, you should be able to introduce some of these players to your startups or begin building relationships to understand what they are looking for and what different requirements they have.
Ending Notes
As the capital landscape continues to evolve, both founders and accelerators must adapt to leverage blended financing effectively. By diversifying funding sources, prioritizing capital efficiency, and understanding the complexities of the capital stack, startups can navigate this new landscape successfully. Accelerators play a pivotal role in guiding founders through this transition, ensuring they are well-equipped to thrive in a blended financing environment.
Strategy & transformation advisor to companies, innovation clusters, ecosystems and governments around the world.
