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Equity capital raise for an emergent software player

The background

The artificial intelligence we are all using today is obviously only the preliminary culmination of many years of development.

In particular, companies were quick to explore how a “natural language generation” process can produce texts that are derived from just a small amount of core information.

This worked especially well in the early days where standard texts were involved that varied little anyway. And where the effort for a person to generate new texts every day from changing parameters was too great.

Agencies initially addressed this problem by helping their customers, for example in the e-commerce sector, to regularly create new product descriptions, such as for fashion items. Or media companies to generate weather forecasts and reports on sports results. What all these applications have in common is that although the basic parameters change, it is not absolutely necessary to design an entirely new article on this basis every time.

In the first stage, these agencies used their own manpower to manage this repetitive content generation process more efficiently. In the next step, algorithms were developed to generate this content automatically.

The target

At the time of the investment search, the company in question still had one foot in the more project-driven agency business model, but had already made significant progress in the area of algorithm development and the marketing of the corresponding software in a SaaS model.

Such companies are rare. Firstly, due to the development of the business model from the rather service-heavy agency model to the marketing of technologies.

And secondly, because this was not a prototype that was tested on just a few pilot customers, but a technological platform already paid for by a majority of clients.

The company also already had ideas about the capital that should be raised to finance further growth. The capital was to come specifically from investors who could create added value beyond money. These could either be private investors who have already gained a wealth of experience in this environment and have a corresponding network – or strategic investors.

The process

Projects taken on by in rebus are always accompanied by a revision of the financial planning and the company presentation, which was undertaken in parallel with the creation of the investor list.

SaaS business models are specific in that several variables need to be taken into account in order to make planning more tangible. Even in a B2B business environment like this, there is no getting around the online marketing expenditure that needs to be made in order to acquire new customers. You also need to consider the churn rate, i.e. how many customers you will lose within a certain period of time – and therefore how many net customers you will gain. And how do you think the license fees will change within the FCST period?

You are trying to assess whether your current business model and company status are suitable for equity financing?

And this abbreviated presentation of the sales planning is only a small part of the overall financial planning, which goes through a number of iterations between the entrepreneur and the consultant. This is necessary simply because the financial planning determines the capital requirements that the company would like to raise from the investor, i.e. an essential part of the entire argumentation chain.

In a strategic investor environment, acquiring capital is both easier and more difficult. Easier because the companies involved probably already heard of each other. And harder because the strategic investor is at least as conscientious as a financial investor. This is true in two respects. Firstly, the strategic investor can get a better idea of the business model of the company in question from the outset, as it either resembles or supports his own. Secondly, because the strategic investor always has to answer to his own committees. This means that at an early stage, he anticipates many of the questions that he is likely to be asked in later internal meetings to analyze and review the respective investment case.

The entrepreneur had already been in contact with one of the three investors who ultimately participated in this growth financing. Two were acquired by in rebus corporate finance.

Approaching and arousing interest is always just one of many steps in a transaction process. We have already mentioned the preparatory measures, such as carefully thinking through the business model (in your own interest).

The details

In addition financing agreements, just like purchase agreements, also have their pitfalls and it cannot be emphasized often enough how important lawyers with transaction experience are in this phase. Without this being relevant in the case discussed here, attention must for insance be paid to when and under what conditions capital is to be contributed. If the investment is to be made in tranches and depending on the achievement of certain milestones, the above-mentioned financial planning is all the more important as a basis for discussion and may, in a modified form, become part of the investment agreement.

In the case of investments from the venture environment, the issue of “liquidation preference”, whereby investors receive one or more times the capital invested in the event of a company sale, might play a major role in negotiations.

These are just two examples of issues that appear to have a particular economic impact. However, this actually applies to the entire investment agreement. The purpose of law is to regulate rights and obligations. In commercial and company law rights are almost always synonymous with a financial benefit and obligations with a service to be rendered now or in the future.

These issues, with all their complexity, often affect the entrepreneur at a time when he or she is supposed to also be taking care of his day-to-day business. Since M&A advisors are incentivized differently than lawyers, the conscientious advisor will always try to fill gaps in understanding based on his experience and put the contract into a context that makes it easier for the entrepreneur to understand it.

The outcome

The investment by three strategic investors came about happily and enabled the company to enter the next growth phase.

In cooperation with the founder, in rebus corporate finance prepared all transaction-relevant documents, identified the buyer and advised the founder on every step of the process – without providing tax or legal advice.

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