April 12, 2022

A new fund for founders who want to get off the fundraising treadmill

London-based D2 offers early-stage companies a hybrid of equity and revenue-share finance

Maija Palmer

5 min read

The D2 Team

Startups wanting to avoid traditional venture capital funding have another new alternative on offer. D2, a London-based firm, has just launched a hybrid financing option that lets startups raise money against a share of future revenue streams instead of giving away equity. 

D2, which has raised a $20m fund for this kind of investing, is part of a growing crop of alternative funding options emerging for startups that don’t feel the VC model is a good fit for them. 

“The reality is that the standard venture capital model doesn’t work for the majority of early venture-backed businesses,” says Amory Poulden, founding partner. “To qualify for VC, new startups are increasingly expected to spin a story about how they’re going to be the next decacorn.” 


But, he points out, only 1-2% of venture-backed seed-stage startups become $1bn businesses. The 98% that don’t become the next Spotify or Shopify can find themselves in a funding cycle that doesn’t necessarily suit the business and ends up diluting the founders equity. 

The reality is that the standard venture capital model doesn’t work for the majority of early venture-backed businesses

“Founders do not on average experience any meaningful uplift in the dollar value of their equity position between Series B and Series D,” says Poulden. Many founders of big scaleup companies own surprisingly little equity in their companies by the time they get to Series D and beyond. 

Aaron Levie, founder of cloud storage company Box, owned about 4% when the company listed on the public markets in 2015. Zendesk founder and CEO Mikkel Svane owned about 8% at its IPO in 2014. (There is a good explanation of the mechanics of founder dilution here.)  

A growing number of startups are opting out of VC

As a result, there are two trends going on at the moment, one visible and the other largely under the radar. On the surface, the sheer volume of VC funding has never been larger. European VC funding reached a record €113.7bn in 2021, more than double the year before. 

At the same time, however, an increasing number of founders are opting to bootstrap or self-fund their startups. Sifted has recently featured startups like Planhat, Yoti and Talentful, which have grown to 100+ headcounts (400 in the case of Yoti) without taking a penny of VC money. The founders cite a desire to remain in control of their company’s development as a primary reason to stay away from venture investors. 

There has been a particular spate of it in France, notes Augustin de Cambourg, founding partner at Shift Finance, a company that advises startups on finance and M&A, in this blog post. De Cambourg cites French startups like Lucca and LeHibou which have reached revenues of more than €15m without VC investment. 

A number of French VCs have emerged in the last few years that will look to invest in only bootstrapped companies, including names like Interinvest, Reflexion Capital, Tomcat Invest and Liberset. 

There has also been an emergence of revenue-based funding options for startups that can demonstrate a certain level of recurring revenue. US-based Pipe was a pioneer in this area, and a flurry of European companies have followed, including Capchase of Spain, Germany’s re:cap and Bridg and Rail and Lionshare in the UK. 

Is D2 different from revenue-based finance?

Many of these revenue-based funders require a startup to show that it has a certain level of recurring revenue already in place. D2 is slightly different as it's willing to fund companies at an earlier stage. 

It offers a hybrid model. D2 aims to invest £250k-£750k in early-stage startups. Founders can take a classic equity for finance route, or they can take a flexible convertible option called a Hero (hybrid equity or revenue option). The Hero either converts into an equity share for D2 if the startup raises a new funding round, or, if the startup decides it doesn’t want to raise any more, D2 gets a share of the startup’s revenues — usually 5% —  for the next five years. Horizan VC, launched in the UK last year, offers something similar. 


Poulden says the arrangement offers an “off-ramp” for founders who might not want to keep going through successive funding rounds. There has been a lot of interest, he says, from “second-time founders who really understand the value of their equity — they know what giving away 10% of it means”.

How do the financials work?

Poulden argues that even if a company grows to have huge revenue, the arrangement would work out 75% cheaper for founders than giving away almost all of their equity through numerous funding rounds. And he hopes it will work out as more lucrative for D2 as well, as the portfolio companies are less likely to go bust.

The classic VC model assumes that around 50% of portfolio companies will fail, another 40% will barely make a return and one in 10 will be an outsized success that returns the fund. With D2 it is the opposite.  

“We’re aiming for a mortality rate of 10% vs the 50-60% of most seed-stage funds,” says Poulden. “If half the portfolio makes 1-2x the original investment rather than going to zero, we don’t need to invest in the next Google.”

Of course, he is still hoping to find the next Calendly — which grew to a $3bn valuation off the back of $500k investment. But the model doesn’t require it. 

D2 has backing from corporations including Shell — Poulden previously worked at Shell’s investment arm — as well as Bland Group, Mountain Labs, a number of family offices and angel investors. 

Not suitable for every startup

There are some limitations to the approach. D2’s financing is aimed mainly at B2B software startups that can be set up on a very lean budget. Deeptech startups that need huge upfront investment costs for close to a decade before being able to get a product out would not be suitable for this kind of funding. 

D2 has invested in three startups so far, including Loma, a search engine for secondhand, rent and repair sites, and Connect Earth, which helps companies add climate impact data to their products. 

D2 is aiming to invest in around 20 businesses and the assumption is that around half the companies in the portfolio would go for standard equity funding and half would take up a Hero. If the split ends up being very different the company will have to keep tweaking the offer. 

“D2 is an experiment and there are a lot of things we will discover,” says Poulder.