FIVE WAYS TO FINANCE A STARTUP
Innovative ideas are the basis of successful startups, but without money, even the best and most innovative of ideas is bound to remain a simple thought in the mind of an aspiring startupper.
It is said that “money produces money”, in the sense that a business as a startup if it works at its best, is able to return multiplied all the funds that have been spent to create them; the problem remains to find the funds, Especially when there’s nothing to finance yet. It is a high-risk bet and often it is not easy to find people willing to face it, in this regard, Demix Group and its Business Accelerator gives you the opportunity to evaluate your project and to plan with you what is the path of growth and development most suitable for your idea or your startup and what are the financing methods more appropriate in this regard.
Is it really that important to fund a start-up?
The first and perhaps the biggest practical problem that an aspiring entrepreneur must face and solve when he decides to create his startup: it is the financing; which does not only concern the phase of creation of a startup, because even companies already in operation may need additional funds to expand their business, funds that are often not in the availability of the startup and therefore require the search for one or more funders.
There is no way to escape this mechanism: having a good idea of business is the starting point, but its concrete development requires funds and in most cases no startupper has all the money needed to carry out this operation. The search for the best sources of financing becomes therefore a crucial phase in the phase of creation and often also in that of development of a startup.
The main channels to which an aspiring startupper can turn to finance its startup, are the following:
- Bank: Is getting funding really possible?
The bank is the first type of financing since it is the most classic and most widespread and among its typical activities there is that of lending money, both to private individuals (a typical example is real estate loans) and to businesses.
It is not easy to obtain financing to create and develop a start-up, as it is an investment considered “high risk”, since it is not possible to make a certain prediction on the success of a start-up, banks may be reluctant to grant financing in return for collateral or guarantees (for example, property owned by the startupper on which to register a mortgage, or personal guarantees by a third party that the bank considers “solvent”, that is able to repay with its assets the loan made to the start-up).
Advantages: normally the funds provided are not “finalized”: for this reason it is possible to use them in the way we consider most appropriate for the development of our start-up, without having to “account” to none of our activities, keeping complete control over it.
Disadvantages: apart from the cases where specific funding is provided for startups, interest rates for bank financing can be very high, so that a startup is in difficulty in making payments, and the demand for strong personal or collateral to grant the funding may prove to be a difficult obstacle to overcome.
- Subsidized Finance: Money at no cost?
Obtaining a financing at no cost or at least at interest rates more advantageous than those proposed by the market is the dream of every start upper: the tool to obtain this result is the facilitated finance.
When we speak of facilitated finance we mean all that series of initiatives, normally provided by public bodies (which may be the European Union, the State, the Regions and the Municipalities), which provide for the provision of subsidies at reduced rates to companies, including start-ups, which have precise characteristics.
The characteristics required to access the instruments of facilitated finance are identified by the notices relating to these contributions and may concern different aspects (the age of start upper, gender, the type of activity, the territory on which it is carried out).
Advantages: the low level of interest rate, which determines the total amount that the start-up must return, and the duration of the financing: it is very unlikely to be able to obtain the same conditions with any other type of financing. In addition, as with bank financing, control over the start-up activity remains fully in the hands of the start upper, which must only “worry” about returning the loan on schedule.
Disadvantages: it is not easy to identify obvious disadvantages in the facilitated finance as a financing instrument for a start-up: the problem may be rather that relating to the characteristics that a start-up must possess in order to access these notices, which are often very stringent, and that relating to the need to obtain, in most cases, a bank guarantee to be able to be eligible for this type of financing.
In addition, it should be borne in mind that in the last period, particularly at national level, subsidised calls for finance have declined and there is always fierce competition.
- Business Angel: a guide to start-up growth
Banks and facilitated finance instruments are the so-called “institutional” financiers: there is also a different category of non-institutional financiers that are represented by private parties, interested in investing their money in start-ups.
The Business Angels represent an interesting solution especially for start-ups in the development phase: they do not grant financing in the classical sense of the word, but offer funds in exchange for a participation in the capital of the start-up itself.
In addition to the capital, the Business Angels make available to the start upper a number of important benefits, which derive from their experience in the field of business (many Business Angels are in fact former managers or former entrepreneurs): we range from assistance in the creation of the start-up, to the development of an effective marketing plan up to the availability of a network of knowledge that can be very useful.
Advantages: The Business Angels “bet” on start-ups, including those with high risk: this means that where there is no bank financing can take over this type of figure, able to understand the real potential of a business idea. You can convince a Business Angel to invest in our start-up even if we do not offer guarantees, but we present a business plan and a value proposition effective.
In addition, the start upper can enjoy a kind of mentoring, which can accompany him in the first phase of life and development of the start-up avoiding him to make those mistakes that arise from inexperience and lack of knowledge of the dynamics of a particular market.
Disadvantages: The very fact that the Business Angel invests in a start-up demonstrates its intention to earn from this investment (a gain that will normally materialise with the sale of the share of the start-up): for this reason the Business Angel follows very closely its investment, also actively dealing with decisions concerning the start-up’s activity. The level of interference is determined by special agreements at the time of the capital injection.
This situation can become a disadvantage for a start upper, which inevitably loses a part of control over his company: it is a limitation on decisions regarding the business activity that for some subjects may be too stringent.
- Venture Capital: to think big
Venture Capital represents another form of non-institutional investors: these entities, usually companies and investment funds, are looking for large profit margins in a relatively short time. For this reason, to attract their attention are highly innovative start-ups in development and expansion. Almost never are those in the creation phase.
As for the Business Angels, Venture Capital does not grant a loan, but enter funds directly in the start-up: the most used method is that of the capital increase, acquiring shares of the same, which they will resell when it is valued enough to produce the expected profit.
Advantages: if a start-up is attractive for a Venture Capital, that is, it has a project that promises great earnings, it is possible to obtain financing even for very high amounts and higher than those offered for example by Business Angel, and also for projects with a high level of risk, which would probably not be financed by traditional channels such as banks).
Disadvantages: a Venture Capital has the greatest interest that the start-up in which it has invested its capital grows and realizes its projects: for this reason, the investment in the capital of the company normally provides powers of “control” (determined by specific agreements) on the management of the start-up itself, so as to be able to intervene in the event of management errors. As in the case of Business Angels it is a restriction of freedom of action that some start uppers may not fully accept.
- Crowdfunding: fishing the money in the network
Another alternative system to finance a start-up, especially in the creation phase, is crowdfunding. It is a system created thanks to the Internet, which we could call widespread funding. In fact, instead of finding a single financier for our business idea, we can turn to crowdfunding platforms and divide the sum that our start-up needs into different shares, which can be financed by many subjects.
Advantages: The costs for this type of financing are minimal: you pay a fee to the crowdfunding platform, normally based on the amount collected and you can finance projects that would not be attractive to traditional lenders, such as banks. Obviously, you need to set up an effective marketing campaign, which can attract the attention of potential donors.
Disadvantages: due to the very nature of this financing system it is not possible to collect very high amounts, but it may be useful to integrate other forms of financing, to reach the total amount needed, and the time needed to organize the crowdfunding campaign and to complete it can also be very long: that is why there is the risk of losing any opportunities that require a timely investment.