What if fundraising wasn’t all as beneficial as it might seem? Directors of two start-ups that entered receivership despite raising several rounds of financing have recently denounced the ‘perverse effects’ of fundraising. Here are some explanations and analysis from the experts at AURIS Finance, a consultancy specialising in mergers and acquisitions.
Could it be that raising funds is not a gift after all? While the market has a tendency to evaluate innovative companies based on the funds raised, the actual situation is more nuanced. According to a study by ScaleX Invest, which analysed bankruptcies in the French start-up ecosystem, 70% of start-ups that passed Series A and went bankrupt in 2023 had raised funds in the last three years.
Hypergrowth without profitability
The recent challenges faced by Masteos, a French rental investment start-up, serve as a cautionary example. At the beginning of 2024, the company filed for receivership. The group had managed to raise €50 million via four rounds of financing between 2020 and 2023. While the reasons for the filing for receivership were not directly related to the funds raised, the influx of capital had the effect of forcing the group to expand rapidly. ‘We were making less optimal decisions than if every penny counted. When fundraising, the primary objective is to spend the money, to put it politely, and to burn it, to put it less politely. That’s what venture capitalists expected from us, especially at a time when hypergrowth was more important than profitability,’ explains Thierry Vignal, founder of Masteos, in the columns of JDN.
The group experienced a significant expansion, growing from 30 to 400 employees over a period of four years. This growth led to a decline in the group’s agility. When mortgage rates rose sharply, Masteos found itself unable to adapt, weighed down by a cost structure that was too cumbersome.
Missed milestones
Home insurance specialist Luko has also encountered challenges associated with rapid growth. In spring 2023, the group began an accelerated safeguard procedure. This has been a turbulent period for the start-up, which had initially set its sights on revolutionising the customer service sector in the home insurance industry. Founded in 2016, Luko raised an initial €2 million in May 2018. In November 2019, in a second round of financing, Luko raised €20 million to expand in Europe, before raising €50 million in December 2020. Concurrently, Luko acquired other companies: first Coya, which gave it access to the German market, and then Unkle, a start-up specialising in unpaid rent insurance. These acquisitions resulted in Luko assuming a significant debt burden of €45 million. Due to the inability to complete a Series C and the market downturns, Luko eventually became the property of the German insurance giant Allianz.
Our experts at your service
Raising funds is undeniably a key step and a guarantee of success for innovative start-ups. However, this step must be part of a carefully thought-out and controlled strategy. It is important to note that rushing this process can be counterproductive. The development of a sustainable company depends primarily on its ability to find its market and achieve profitability. Poorly controlled or premature hyper-growth can weaken a company rather than strengthen it. At AURIS Finance, our sector-specific experts provide comprehensive support for growth projects, encompassing fundraising, identifying financial partners and targeted acquisitions.
