Raising Funds: A Journey Fraught with Challenges. Decipher the Risks to Better Manage Them.
Fundraising is often portrayed as the royal road for companies aspiring for rapid growth. For many, it symbolizes access to unlimited capital, validation of a business model, and access to invaluable influence networks. Yet, behind the glitter of successful fundraising announcements lies a complex set of risks that every entrepreneur must understand and anticipate. Ignoring these potential challenges can lead to major disappointments or even the loss of control over one’s own project.
This article aims to dissect these risks by providing a precise and well-supported analysis of each aspect, equipping you with the necessary knowledge before embarking on this financial adventure.
1. Capital Dilution and Loss of Control: The Price of Acceleration
The most fundamental and often most feared risk by founders is capital dilution. To acquire the necessary funds for their development, entrepreneurs give away part of their stake in their company to new investors. This operation directly reduces their ownership percentage and, consequently, their decision-making power.
Valuation: The Crux of Dilution
The severity of dilution is directly related to the company’s valuation at the time of fundraising. If the company is undervalued, founders will have to give away a larger percentage of equity to obtain the same investment amount, resulting in excessive dilution. Conversely, overvaluation might seem advantageous in the short term as it minimizes initial dilution. However, it can create a significant problem for future funding rounds. If the company fails to justify this initial valuation through growth and performance, the next round might occur at a lower valuation, known as a down round. A down round is not only a negative signal to the market and employees but can also trigger complex clauses in shareholder agreements, penalizing founders and early investors even further.
In very early stages, like Pre-Seed or Seed, valuation is often low because the company may not have a final product, minimal or no revenue, and its technology might be unproven. Business Angels or early Venture Capital funds are betting on the team and the idea. This means founders accept significant dilution from the outset, which can complicate efforts to retain a majority stake in the long term.
Loss of Control: A Tangible Reality
Dilution is not merely about the percentage of ownership; it is intrinsically linked to the loss of control. When founders become minority owners or investors gain a significant position in equity, they often demand board seats. The board then becomes the strategic decision-making body, and founders might find themselves compelled to follow directives that don’t always align with their initial vision.
This loss of power can manifest in votes on major decisions such as CEO appointments, M&A transactions, product strategy changes, or even the company’s exit (IPO or sale). The influence of investors, particularly Venture Capital (VC) funds, is considerable. They have clear performance mandates and defined exit horizons (usually 5 to 7 years). This investor pressure to maximize returns may lead to a divergence of interests with founders, who might have a longer-term vision or different goals, like prioritizing social or environmental impact over sheer financial profitability. Misalignment of strategy can then become a source of tension and conflict within the company’s governance.
2. Strategic and Operational Risks: Accelerate Without Derailing
Raising funds is committing to a path of hyper-growth. But this exponential acceleration comes with its own operational and strategic pitfalls.
Pressure on Profitability and Unmet Objectives
Raised funds aren’t donations; they are investments with an expected return. Pressure on profitability is omnipresent, especially as the company progresses through its funding rounds (Series A, B, C…). Investors will set clear, often very ambitious objectives regarding revenue, user growth, margin, or profitability. Failure to meet these objectives, or not reaching the defined Key Performance Indicators (KPIs), can have severe consequences. It may make the next funding round more difficult, if not impossible, degrade relationships with current investors, or even call into question the company’s viability.
Execution Risk and Uncontrolled Growth
The money is there, but effectively utilizing it is a challenge. Execution risk is central: a company may have an excellent product and a promising market but fail to deploy its growth strategy. This can result from poor hiring, internal management issues, or inability to quickly adapt to market changes.
Uncontrolled growth is a common pitfall. A company that doubles or triples in size in a few months must adapt its structures, processes, and culture. The example of Masteos, cited in contexts of judicial recovery, illustrates this risk: rapid expansion without the necessary solid foundations (robust internal processes, quality hiring, suitable tools) can lead to collapse. Resource management becomes a critical issue: just having money isn’t enough; knowing how to spend it intelligently to maximize its impact is crucial. The temptation to recruit massively without a clear strategy, or to launch too many projects, can dilute effectiveness and rapidly exhaust capital.
3. Legal and Contractual Risks: Small Print Matters
Raising funds is above all a complex legal operation. Signed documents commit the company and its founders for the long term.
The Shareholders’ Agreement: A Gilded Cage?
The shareholders’ agreement is the most crucial document after the investment act itself. It governs relationships between all shareholders and contains binding clauses that can severely limit the founders’ freedom. Among these clauses are:
– Liquidation Preference: Ensures investors are repaid first, often with a multiplier (e.g., 1x, 2x), in case of sale or liquidation, before founders receive anything.
– Anti-Dilution Clauses: Protect investors in down rounds by granting additional shares to compensate for valuation drops.
– Veto Rights: Investors may have veto rights on strategic decisions (new raises, company sale, significant expenditures, statute changes).
– Forced Exit Clauses (Drag-along): Allow majority shareholders (often investors) to force minority shareholders (including founders) to sell their shares in case of an acquisition offer.
– Non-Compete Clauses: May limit founders’ ability to create new companies in the same sector after departure.
Negotiating these clauses is fundamental. Poor negotiation can turn a shareholders’ agreement into a real “gilded cage,” where founders head their company without real decision-making power.
Due Diligence: An Intrusive Scanner
Before investing, investors conduct thorough due diligence. It is a comprehensive audit of the company (financial, legal, social, technological, commercial, environmental). Any issues discovered at this stage, such as ongoing litigations, intellectual property flaws (undeclared patents, unprotected trademarks), regulatory compliance problems (GDPR, industry standards), or accounting errors, can lead to due diligence failure. This can not only derail the fundraising but also reveal critical vulnerabilities for the company.
Hidden Costs of Fundraising
The fundraising process isn’t free. Costs can be substantial, including fees for specialized lawyers, investment bankers or fundraising consultants, audit fees, valuation, etc. These costs can quickly add up to tens, if not hundreds of thousands of euros. If the fundraising fails or takes longer than expected, these expenses can heavily weigh on the company’s cash flow.
4. Human and Reputational Risks: The Team Under Pressure
Raising funds deeply impacts human resources and the company’s image, both internally and externally.
Team Demotivation and Talent Loss
The pressure from investors to meet growth objectives can cascade onto teams, leading to intensified work and increased stress levels. If founders are too absorbed in fundraising and less present in the field, it can lead to team demotivation. Moreover, significant founder dilution might give the impression that the value of their work is being more broadly shared with new entrants, potentially affecting morale and commitment. In the long run, this can lead to the loss of key talents, essential employees who choose to leave the company if the work environment becomes too demanding or if the future perspectives are no longer clear. Dependency on founders is particularly strong in early stages; their exhaustion or departure can jeopardize the entire project.
Impact on Reputation
Fundraising failure is not without consequences. A failure announcement can tarnish the company’s reputation, discourage future investors, and even alarm customers or business partners. It can also signal financial weakness or underlying issues that didn’t convince investors. Conversely, successful fundraising grants strong credibility and a dynamic image, but this image must be maintained through continuous performance.
Disclosure of Sensitive Information
The fundraising process requires disclosure of sensitive and confidential information. Detailed business plans, financial projections, client lists, technological secrets—are all shared with potential investors and their advisors. Despite non-disclosure agreements (NDAs), there’s always a risk of information leakage or misuse, especially if approaching potential competitors or industry players.
5. Risks Specific to the Fundraising Process
Beyond consequences, the process itself presents its own challenges.
A Time-Consuming and Energy-Sapping Process
Preparing a fundraising is a colossal task and extremely time-consuming. Founders need to develop a solid business plan, a compelling pitch deck, detailed financial projections, and spend countless hours meeting with investors, negotiating, and answering multiple due diligence questions. This absorption of time and energy diverts founders from their core business: the company’s operational development. For months, they’re less available for their teams, clients, or innovation.
False Expectations and Potential Failure
It’s easy to develop false expectations about the investor market. Reality is often harsher than imagined: the success rate of fundraisings is relatively low, and many companies do not find the hoped-for financing. Failure to raise funds after months of effort can be devastating for the founders’ and the team’s morale and can endanger the company’s very survival if funds have not been raised elsewhere.
Fundraising, a Necessary and Manageable Evil
Fundraising is not a golden path, but rather a complex road strewn with significant obstacles and risks. However, for many