VC vs public money

On November 29th, 2022 I attended a meetup organized by co.brick Venture Building that covered the topic of how to finance startups. Great speakers from startups (Meetlify, Stream Sage), VC (Level2 Ventures), and companies specialized in acquiring public money (GRANTS.CAPITAL) talked about the pros and cons of getting money from VCs and public funds. In this post, I cover my learnings from the meetup that are worth considering before going one or the other way to fundraise.

Public money

Public money may seem to be the best option as it has significant advantages:

• is secured by countries or unions (like European Union),
• there are programs suited for all sizes of beneficiaries (companies),
• usually, you keep the equity.

Even though it feels great, some disadvantages may outweigh the pros:

• process of acquiring the money is usually complex (lots of formalities) and long-lasting,
• you need to have 20%-25% of the subsidy secured in cash due to:
  • own contribution,
  • delays in payments of the initial tranche,
  • delays in the settlement of the subsidy,
• it is a good practice not to build your cash flow on subsidies - due to the possible delays mentioned above, you may lose financial liquidity and go bankrupt, even though you have significant amounts secured,
• pivots are complex:
  • slight changes are possible, yet big pivots may be impossible,
  • even if a pivot is possible, it won't be quick - from the discovery of a new market niche to legal resolution a lot of time may pass.

So when to use public money? When you have cash flow secured and aim at costly investments in research, public money is a great choice. Having public funds secured for the riskiest part of obtaining unique IP is also welcome by VCs - they can see that your business is rolling (cash flow), you have secured funds for R&D (public money), and the equity is not diluted, therefore the overall risk for VC is reduced.

Venture capital

This form of funding a startup is not only about money. VCs usually help their portfolio companies to grow. Let's take a closer look at the pros of this form of fundraising:

• the investor has an interest in the company's growth and should help to accelerate this growth:
  • by the money, they are contributing,
  • by bringing know-how, sometimes from areas where technical teams struggle, like marketing or business development,
  • opening their network/portfolio for synergy
• good VCs advise their portfolio companies and help to avoid wrong decisions (from strategic directions, through team composition, to cap table planning),
• VCs have access to offers and tooling exclusive to their network (discounts for mandatory tooling or services).

As always there are also downsides you need to consider:

• VCs demand equity for their investment, the riskier the business, the more equity you need to give away,
• if you are unlucky, the VC you work with will only put restrictions on you and will demand reporting, instead of pro-actively supporting you,
• in the post-covid era, only the best businesses can get funding - you need to have a good business idea with a well-recognized market and solve an actual problem of your customers - your product should be a painkiller, not a vitamin. It's not easy to prove to a VC that your product is such.
• VCs tend to be more careful spending money. Due diligence will be conducted before you will get the money and it requires good preparation.

When to use private money to fund your startup? In my opinion, in the case when you need to secure your cash flow and want to grow your business by uptaking go-to-market or marketing activities VC will be of great help. It is also important to consider the moment when to ask for funding. VCs are usually eager to invest in companies that show traction (have customers who pay) and demonstrate constant growth (month-to-month, ARR, ...). Simply put, at the inflection point of the hockey stick, VCs will give you more capital for less equity.

Why not both?

Knowing the pros and cons of both, it may be tempting to combine them. Is it a good idea? As always, it depends. In my opinion, it is good to consider the following before making a decision:

• do you have enough resources to handle the overhead generated by both?
• are there any contradicting requirements related to the subsidy and strategy related to business development eg. will you need to move the IP abroad?),
• are you able to get prepared to fight for both?

Usually, it is possible to combine both and satisfy all of the requirements, nonetheless, it comes at the price of extra effort, which can be significant and temporarily may slow you down, especially if you have a small team to handle it.

Summary

Depending on the level of development of a startup, this or the other way of funding its activities may turn out to be better. A short checklist before making a decision should include the following:

• cashflow - can you afford to wait for money for up to a few months?
• cap table - how important is it to avoid share dilution?
• activities to be funded - technical/business or scientific/research?

How do you fund your startup? Share your thoughts in the comments below.