Insights

Raising capital is a sign of big step-change for any startup. And as you review term sheets and investment offers, you can expect to factor deal fees into the investment terms (and therefore your own capital model). If this isn’t something you’ve encountered as a founder, deal fees are an implicit part of the venture ecosystem and should be factored into your investor ROI forecasts – ultimately it’s real investment, impacting your real returns. When understood properly it’ll help a founder to foster more aligned investor relationships, with everyone on board for achieving real returns in the long run.

Let’s unpack what deal fees are and why they exist.

Why Do Deal Fees Exist?

Simply put, professional investors are in it for the long haul. Venture capital isn’t a quick-turn business – it takes on average 5-8 years before an investor sees a return. In that time, investment firms are sourcing & assisting startups, conducting due diligence, negotiating terms, and providing hands-on support. This requires dedicated teams and real operational costs. Deal fees help ensure investors can do their job well so you get the backing and expertise you need to grow.

A Look at Common Fee Structures

• Traditional VC Funds
  These funds charge 1.5%–2.5% annually over the first five years of the fund, tapering off later. Across a 10-year cycle, this adds up to around 15% of the total fund size. Smaller funds may also pass on some legal or diligence costs to startups, but this helps ensure the investment process is robust and well-supported.
• EIS & VCT Funds (UK)
  Thanks to generous government tax reliefs, these funds often charge startups a 1%–4% upfront fee for diligence and legal work, plus an annual 2% fee. Some GP’s will ‘gross up’ the investment to account for these costs, meaning a founder might receive the amount of capital initially requested – but with higher equity dilution accordingly.
• Venture Debt Providers
  Deal fees here include a 1%–3% arrangement fee, plus interest ranging from 6%–12%. These costs are offset by the flexible, less-dilutive capital that debt provides, helping you scale without giving up the same degree of equity as straight up investment (VD often carries warrants for limited equity in return for the risk involved in providing venture-based capital where other lenders simply won’t.
• Corporate Venture Capital (CVC)
  CVCs often absorb some of the ongoing operational costs internally, but when leading rounds they may include diligence or legal fees. These investors bring strategic value and industry insight and often a more hands-on approach to growth over the long run.
• Angel Networks
  They charge up to 10% or more of funds raised for their efforts, often with an annual monitoring fee where the network is more active in supporting a founder’s future growth. For very early-stage companies, this access to the network can be a game-changer and well worth the fees.

A Summary Thought

Deal fees are a sign of a serious investor. They reflect the time, resources, and expertise being committed to your success. As you build your company, understanding the economics behind venture investing will only make you a stronger, more confident founder. And behind the numbers is the more qualitative value of a stronger support team and a more valuable network to open doors along the way – something any future proofed business will want to demonstrate!

As a general rule our investment focus is across B2B platform & services industries, but now and then we see a business with a consumer focus in their revenue model which drives strong B2B2C channels for sustained growth – and with our first digital MedTech investment we saw just that.

Five years on from investing into RXLive and securing co-investment from the UK and North America of more than a million dollars, we’re excited to have completed the investment cycle with an agreed secondaries sale including our syndicated investors. It’s always a tough market for any growth-stage company, both in terms of capital raising and in their efforts to generate incremental revenue & margins (ideally with both being increasingly positive!), and in the case of RXLive the energy-filled founder continued to deliver on m-o-m growth throughout the investment period. A testament to his passion for the technology he created!

An exit can take a variety of forms, where you can chalk up one more successful exit (or not!). In a market that feels the blunt end of government-led reductions in the national health budget, a MedTech that is inextricably linked with that health system can only thrive within the limitations of what that health system makes possible. With the timing now right for the business to restructure as it enters the next phase of market positioning, all stakeholders have done well to complete the exit process through a secondaries transaction that will allow us to take the next cohort of our portfolio through a similar cycle of growth. And for RXLive it’s full speed ahead with the new round of investment and a new direction.

As we enter the new year with a number of impressive scale-up businesses joining the portfolio, the agenda for investment & venture building at Axial Capital will be as active as ever.

Founders and CEO’s building a business are typically caught short on time for almost everything – and particularly when a capital raise gets under way, it’s one more thing that demands attention when your day simply doesn’t have enough hours. This is even more acute when you hit expansion stage, and like most things if you share the burden you can achieve more with the same number of hours – and outsourcing the capital-raise efforts is a logical part of the process. The question is who to outsource to.

By outsourcing you can get support on the activities where you have most need, and better yet you can increase access to broader networks, without sacrificing the quality of expertise – and when it comes to the fundraising process, it makes sense for this to be overseen by an investor with a keen interest in seeing your business succeed. Inherent in the process of expanding your capital base a CEO can always benefit from a broader base of financial guidance, but might struggle (or simply not find it necessary) to justify full-time CFO support in-house, and particularly on a limited budget. That’s where leveraging your investor base, with a focus on your more industry-experienced investors, can be a source of (and access to) innovative solutions and sources of capital.

Consider this: hiring a full-time CFO in the UK can cost upwards of £120,000 annually. Having an investor or board member provide you with a substantial portion of those efforts might cost just 10% of that. That’s a nice buffer for your runway.

As the business grows, financial requirements become more complex. Having someone on your cap table who can actively support those future rounds is a built-in hedge against further strain on your other priorities as CEO. An active investor’s involvement can enhance credibility with other potential investors, and can accelerate the process of securing funding through each phase of growth. Ultimately the backing of an existing investor, both for the business itself and for advocating further investment into your ambition and your growth prospects, can provide much-needed reassurance to those considering a financial commitment, and can open doors to more bright minds that will add value as the business scales.

As a not-insignificant aside, it stands (perhaps obviously) that having your investors involved in the ongoing development of your capital stack can also contribute to building a strong financial foundation. This is a foundation for long-term success, putting a set of experienced minds to work for continually reviewing whether your financial practices are optimal – both now and for achieving the type of exit you have in mind. If a CEO takes those steps early on in the approach to corporate planning, the headlights can shine all the more brightly on the road ahead..

I had coffee recently with a good friend and entrepreneur who had come out into the daylight after many (many) long months of building out his latest venture. We were sitting at the window bench of a great little west London coffee & vinyl bar that we like to meet at to talk over life and business, and he made a comment that struck a chord: “sometimes you just need to know when to draw a line. And accept that even by investing more hours, more weeks of work, it simply isn’t a good enough venture to pursue in the long run”.

He was referring to his recent venture, and he was talking to the right people to become supporters of that new venture, but the committed buy-in he wanted from those people to fully validate the business model ultimately wasn’t there. As a many-times founder he’s experienced in building businesses and is aware of how important validation and a supportive corporate structure is, early doors, if you hope to deliver and to make a viable and sustainable business from a new venture.

And now to drawing a line on DD. As a corporate-led investor we have an investment model on our Ventures side of the business, and we tend to stick to it. So it was a sage reminder of how to most effectively use (invest) time when my friend said that sometimes you just have to draw a line – particularly as we receive 40+ requests each week across our Ventures and our Corporate Finance desks.

Whilst DD is a series of financial, technical and human reviews and typically involves many hours of combined efforts to agree that taking the journey together make sense, it must start with the founders of a business having an understanding and appreciation of what it really takes to build a lasting business – and not to become one more of the 80%+ of founders that see their business fail before it ever truly succeeds. At the centre of any good investment is aligned interests and a managing team that understands the value of a strong corporate structure. And it’s that critical acid test that we apply at the early stages of DD to gauge whether a business (and its founders) can see those realities and will be truly backable, which allows us to draw a line and to walk away when a founder tells us all they want is the money so they can ‘go it alone’.  

Just as we value the collective DD process that we often undertake with our co-investors, we also put more focus on those investment opportunities where the founders put value on building their business with a robust corporate structure in mind from the earliest stage of growth. And those future leaders are to be celebrated!

As a corporate investor that backs growth-stage businesses with corporate-resource based capital, we have always advocated for good business fundamentals just as much as (and in fact more so) the common approach of burning through investment just to drive revenue, particularly if this results in unsustainable growth over the mid term.

Here’s a good reality check for founders striving for success. Businesses have to make money to survive and to succeed, and investors are increasingly erring away from the tried, tested (and often failed) attitude of ‘growth by long term negative burn’. In a recent survey of founders at the time of writing this article, 84% said they were under more pressure (from their investors) to prioritise profitability. An unsurprising sentiment given the tighter early stage investor landscape – it will be interesting to see how sentiment evolves as more investments mature this year.

The upside being that founders have mostly followed that advice (at least those whose startup has survived), with 64% having cut back on new hires and 57% trimming staff costs; and 49% have also made savings on office costs.

Increasingly founders have said they’d like more help with industry & investor connections, which is exactly the strategic support we believe investors, whether cash or corporate in their model, should focus on when backing growth-stage companies (biased as we may be, given it’s the crux of our investment model).

The survey also found that 71% of startup founders feel like their relationships with their investors has become strained over the past year with 44% of founders acknowledging that many traditional VC investors were not super helpful when it comes to business strategy – meaning that founders, often first-time leaders that lack corporate experience, are left unsupported in executing on the growth initiatives that all stakeholders have ultimately bought into by backing the business. It’s high time that founders and funders alike leverage the real value of ‘better together’ when scaling for success.

Big salaries don’t always equate to big opportunity, and for the right talent with the right ambition a growth-focused company that needs your skillset can be the right opportunity. And if you’re a founder then you already know what we mean! When we commit our resources to a portfolio company it’s usually when that company has proven that a substantial market exists for their service or technology, and it’s usually at a time where just a couple of founders are juggling much of the operational growth – and the headaches. This is where growth investing comes into its own.

The balance to be struck for a founder is to get the best possible skills and know-how into the business at a time when cashflow is often at its tightest. And for those with the talent to generate the accelerated results that an early stage business craves the upside needs to be attractive enough for the effort required – with an aligned objective to make big things happen for the business. So, how to square the circle?

The team that ultimately builds a business is often not just the founder and a core group of employees. To create a camp of knowledgeable or well-connected shareholders and advisors, along with operational team members that share your vision and will benefit when the business does well, can serve a business well to accelerate growth. That shared vision and shared reward-for-effort can (and often should) be a fundamental component of the returns that each member of the camp will work toward, and tying equity to that involvement is the ultimate reward mechanism.

Aligning equity accrual and income upside for your supporting ‘camp’ will keep everyone focused on the blue-sky objectives of the business, and at the same time will encourage more engagement on challenges and opportunities – and importantly, ideas and solutions to keep the momentum you want. Once you create alignment that encourages a win-win culture for everyone who supports your business, then you’ve created a collective vision that everyone can buy into.

So what next? It’s time to think about what skills and value-add you’d like to bring into the business, then think less about how much cash you want to raise to ‘buy’ those skillsets, and instead think about how to align interests for everyone so value is earned and shared. Talk to us about it, we take that approach across our portfolio every day.

We recently read that since 2015 almost a third of European companies who expanded to the US did so even before they had raised a Series A. That’s a big step at such an early stage. Expanding to the US is a strategic decision for a startup, and expanding too soon could potentially be at the expense of continued growth on your home turf. But expand too late and you risk losing the US market to a competitor.

The ideal scenario for any scaleup is to get traction and to position yourself both in your home market and in further growth markets – at the same time. Getting your business to a place where you have users in a target market already engaging with you, rather than going in cold with full commitment and a big investment risk, can make executing your growth plan a lot easier. And that’s a strategy that can pay dividends if it’s executed the right way.

Axial Capital has established a presence in key markets including the US and Europe to support our portfolio companies with a lean platform for accessing these new markets, providing a soft-landing approach for accessing the international marketplace. The creation of a US subsidiary will immediately bring you within the US tax net in one sense or another, so a soft-landing approach can be the ideal way for ambitious business operators to spearhead in-country market testing and business development ahead of making a more substantial commitment.

By investing our resources in first phase US expansion for British and European scaleups – or vice versa for US businesses that want to enter the UK market – our portfolio companies can manage this expansion from their home operating base until it feels right to ‘follow that growth’ with a new corporate entity in-country. As the post covid-era of growth businesses increasingly have a tech-enabled bias and are scalable by nature, the obtainable market for so many of them is as exciting as it’s ever been!

Technology advancements in indoor farming are revolutionising agriculture. When you think of the thousands of food varieties being farmed differently across countries and continents, the impact is truly global.

These innovations promise more sustainable and efficient food production, even in urban settings, and Axial Capital is leading investment and research collaborations for AgriTech startups in a number of these verticals. 

How do you define ‘AgriTech’? In short, broadly! Cutting-edge lighting and imagery systems provide tailored spectra for optimal plant growth while conserving energy as compared with legacy methods. Automated climate control systems adjust and balance temperature, humidity, and CO2 levels precisely across the breadth and varying height levels of each indoor environment – pivotal for accurately managing rising heat and pockets of humidity.

And further yet: hydroponic and aeroponic systems deliver essential nutrients directly to plant roots, enhancing yields and reducing water usage. And sensors driven by AI algorithms continuously monitor plant health, detecting issues before they escalate – a particular vertical we are supporting very actively.

These advancements not only boost crop productivity but also reduce the need for pesticides and herbicides. The very real threat of food shortages is an increasingly common news piece, but we’re highly conscious too of the long running use of chemicals and excessive water consumption in our food chain, and as new technologies improve yields across global centres it is slowly but surely contributing toward a healthier planet at the same time. Indoor farming’s future looks promising, being more than a glimmer of hope for the world’s food security and environmental challenges. A worthy commitment of time and resources in our view!

In the ever-evolving world of a business growth, traditional funding source of venture capital is no longer the outright lead provider of capital that it once was. As the funding landscape shifts, entrepreneurs are turning to alternative strategies like growth-debt, government-sponsored funding, and accelerator programs to fuel their ambitions. Let’s take a closer look at the current funding environment and the innovative pathways that are increasingly driving capital models and avenues for growth.

The funding scene in North America has experienced some stagnation across all stages, with later-stage startups and tech-focused companies taking the hardest hit. Since the first quarter of 2023, investments in these sectors have notably decreased by 33%. The root cause can be traced back to a broader market decline affecting technology and life science companies generally, leading to lower valuations and delayed pre-IPO rounds for startups.

Nearer to Axial’s HQ in the UK and Europe, a similar situation is unfolding. External factors such as the war in Ukraine and a struggling global economy have contributed to surging inflation and increased interest rates. These economic challenges starkly contrast with the record-breaking cash inflows that high-growth businesses enjoyed 18 months ago. As a result, startups in Europe are facing familiar territory in the cultural expectation that they should establish robust market positioning and demonstrate growth in topline income before funding might flow more freely.

In response to these shifting dynamics, founders and operators are exploring various avenues to sustain and grow their businesses. M&A has increasingly offered a mechanism to bolster market share (and ideally a stronger combined balance sheet) with businesses consolidating their funding via strategic partnerships – and at Axial we are leading on transactions on this basis both for accelerated growth and for more urgent defensive strategies. The realities for founders is this often requires a considerable amount of time and may even lead to valuation down-rounds.

Financing driven by forward revenues is another funding model that we build into our support for growth-companies. In this approach, a company receives an upfront sum of capital and future recuring earnings serve as both the rationale for for the financing and for repayment. This model aligns the interests of investors with those of the startup, promoting sustainable growth without the burden of traditional debt.

Corporate partnerships and sponsorships are also proving to be lifelines for businesses looking for growth. Larger companies are investing in startups, often in exchange for access to innovative products or supply chain advantages, and cross-border partnerships can be a pivotal catalyst for accelerating new business. These strategic partnerships can provide startups with the resources and expertise they need to thrive – whether in a new market or a challenging market – and with our offices operating across the US, Europe, UK and Canada, Axial’s team takes this approach with many of our portfolio clients.

Despite the challenging funding landscape, entrepreneurs are natural risk-takers and innovators, and the current funding dynamic is likely to drive even more creativity and open up unique opportunities for those who can adapt and pivot effectively.

The road ahead for ambitious business operators may be unchartered in many cases, but there’s nothing like a challenge to truly define the entrepreneurial journey. By embracing alternative funding avenues, strategic partnerships, and a resilient mindset, startups and growth-driven SMEs can weather the storm and re-shape the future of their industries. The entrepreneurial journey is ever-evolving, and those who navigate the changing tides with creativity and determination will undoubtedly find success in the new landscape.

Is it time to hand important financial decisions to GPT? The answer to that question was a resounding No not too long ago, but the ‘intelligence’ bit of AI has moved on rapidly in just the recent year, notably enhancing precision and adaptability, to the point where a recent market-review article illustrated how AI was fed technical data to undermine Reuters’ bullish stance on Rivian stock – ultimately giving a result of ‘under-perform’ when taking into account previous stock data, and suggesting a sell recommendation on stock that Reuters was openly positive about. Right or wrong, that’s interesting.

Across our client portfolio we are increasingly seeing AI (or at least an attempt at it; automation is not AI) bolster services and solutions that are being deployed across sectors from agri through to InsurTech and workflow management. If, like us, you have asked Bard or GPT the same question in different ways to ultimately get to a reasonable answer, you’ll appreciate that even if a certain level of manual intervention is still relevant, the emotive or ‘human factor’ is not – and that’s where the potential for value (and to outmaneuver a human) really runs deep.

One reason we really like the concept of bringing AI into the markets or sector applications across our client portfolio, is that it generally means the degree of scalability for that business is greater than before – and with our operational model being focused on expansion as much as investment, supported by our team across multiple geographies, the results from our collective efforts with each client can be all the more enhanced. A great case in point is a client in the AI process automation space, whose technology we are introducing across our portfolio for testing and circular feedback, so ultimately the collective financial returns can be incredibly impacting. It’s not quite a focus on financial decisions in the end, but the financial results speak for themselves!

Having our team located across North America, the UK and Europe gives our clients access to a uniquely international network of investors and strategic partners. By involving Axial team members from multiple geographies on many of the transactions we manage, we help to open new market opportunities through our extensive relationships – further enhanced by the pull effect of engaging new capital from multiple regions. In periods when capital markets & private equity in general face headwinds it’s our multi-channel, multi-region operating model that allows our clients to continue achieving more forward momentum than a single market might provide – and with a view to achieving enhanced operational outcomes through those strategic financing activities.

So what does strategic growth capital look like? Ultimately this is a factor of sector, geography, corporate objectives, and a multitude of more nuanced considerations that will see the process managed differently for each founder going through an exciting period of growth. Through distribution and partnership collaborations our clients gain access to know-how and networks in new markets, and potentially enhanced opportunities for deploying their services and technologies – and with scope for resource sharing and cost efficiencies as a result.

As every founder knows growth is not without its challenges, and the investment of time with the support of Axial’s network of consultants can put shape and structure to the milestones a business wants to hit as it passes through funding rounds. Every founder talks about their roadmap, and the trick is making sure it’s the right one!

Ultimately commercial and strategic alignment in the growth objectives of a business can be a great way to accelerate growth, and to leverage the strength and collective knowledge of a more significant network. With our consultants having backgrounds from private equity, capital markets, and international consulting firms the perspectives that our project teams bring to each client engagement makes each year of expansion all the more enjoyable!

The boom in the European CleanTech startup sector, and in the capital markets that have poured billions of pounds into accelerating those enterprises, has seen an incredible array of waste-repurposing and pollutant-reducing innovations come to market. We’ve been fortunate to see a few of these in our client portfolio, from green energy storage & managed-distribution systems, through to conversion technologies that bring cleaner outcomes to the fossil-fuel-driven logistics industry.

Deal values last year across the CleanTech space once again increased significantly on previous investment levels, rising from €7.3 billion to €9.7 billion across Europe. Looking at the stats behind the headlines, the number of transactions being financing is flat-lining, whilst the value of those deals is increasing. The average size of a financing round has risen from €3.3m in 2020, and €6.6m in 2021, to reach €10.7m average investment ticket in 2022. And there’s logic behind those numbers.

The upward trend we’ve witnessed is largely due to the industry maturing from its emergence as a nascent sector just a few years ago, which has led to a higher number of later-stage and follow-on financings at higher ticket levels. On top of this the sector has witnessed a number of notable megadeals including Northvolt, Climeworks, Sunfire, and Infarm to name a few – all of which booked rounds in the hundreds of millions. Impressive values, irrespective of the sector.

So if you’re a CleanTech founder pushing the boundaries – and pushing on the doors of venture capitalists – where is the optimal country to put down roots? If we look at recent stats (yep, we keep going back to the stats) Sweden tops the table, at least by deal volume. With a cumulative financing volume of €6.4 billion over the past four years, Sweden is significantly ahead of second-runner, the UK, with €4.0 billion, and Germany in third with €2.8 billion. Admittedly these numbers are a tad misleading, with Sweden’s Northvolt running four successive mega rounds, single-handedly taking €4.7 billion of that funding.

And if you’re still contemplating which vertical to delve into for your next CleanTech venture? The recent few quarters have seen energy-storage & E-mobility attract the highest funding. With a deal volume of €6.8 billion, the energy storage sector leads the way across Europe. Interestingly this is driven in part by the rise of the second largest vertical, e-mobility, as well as the expansion of renewables, which collectively create additional storage demand. Again, without Northvolt’s bull run the energy storage vertical would only be ranked 4th, with energy generation running up alongside storage.

A clear pattern has emerged through this first era of CleanTech, with the largest verticals being notably synergistic and helping to spur growth and innovation interconnectedly, whilst still remaining specialist enough in their own right to evolve independent industries unto themselves. Though, as time has shown us on many occasions, convergence and consolidation are never too far into the distance. Nevertheless we see exciting times ahead for a welcomed and warranted industry of innovators.