According to CB Insights Study and Intelecrum's own first hand experience, the biggest mistake entrepreneurs make is trying to solve a problem that nobody has... If you have been able to overcome this problem, the second, according to the same report, is to run out of funding! That's why it's vital to be clear about how and through whom to finance your company at each stage. Last year, the Spanish entrepreneurial ecosystem was at its best, with growth of 40% in investment compared to the previous year, which had 779 million euros invested. And despite these good numbers, there is still a long way to go to be able to compete with other countries such as the United States. So, through whom and with what instruments can you get the funding you need to finance your startup?
- Self-funding from the founders
The first and easiest option is to use our savings or capitalization money for unemployment benefits.
- Las 3F's: “Family, Friends and Fools”.
At the beginning of the life of a startup, there are few metrics (sometimes none) that can allow us to deduce the commercial viability of an enterprise, so when we seek funding what we are actually doing is selling “expectations”... and who is buying expectations? In general, people who know us, friends, neighbors, former bosses and former co-workers, who are familiar with our abilities and are confident that we will be able to succeed and, by the way and why not, enrich them. It is also possible that at this stage we will find a novice investor, who is beginning to explore the topic of investments in startups and who, without knowing us and without being able to access metrics, still risks investing in us... They are what in jargon are known as “fools”, but which we like to call more” newbies” or “clueless”, since we are all wrong. The average amount of money raised this way ranges from 10,000 to 50,000 euros. An advantage with this type of investor is that, being trustworthy people, they are easier to convince and the conditions for the return of resources will be more favorable. However, if things go wrong, the situation can create pressure on personal relationships.
- Strategic partners of entrepreneurs.
Alliances with individuals or companies in exchange for a percentage of the company. With this form of financing, you get resources, contacts and experience in exchange for a small share in the company, which for it to be convenient for all parties should not exceed 10%. The possible loss of control of the company or a very early dilution of your shareholding percentage, from our point of view, is out of the question at these stages and is not a good decision.
- Accelerators And incubators of Startups
They are figures that accompany the entrepreneur on his initial journey and offer him both resources and visibility. The differences between an Incubator and an Accelerator are often blurry. We like to think that an incubator is an organization that helps to form a team of entrepreneurs and from there it provides support in all subsequent stages up to the search for initial funding. Unlike an accelerator, which works on the basis of an already formed team of entrepreneurs and often (but not all) that already has an MVP in the market and initial business metrics. In both cases, they are options that have the potential to add more or less value depending on the experience and number of contacts of the entrepreneur or the entrepreneurs. The less the entrepreneur knows about the entrepreneurial ecosystem (business angels, investment forums, VCs, etc.) and the lower level of work experience they have, the greater value these organizations provide. Very important startups such as Airbnb or Glovo went through accelerators (YCombinator and Conector respectively).
- Crowdfunding
Crowdfunding is based on the economic contribution of small investors, usually with little knowledge of the entrepreneurial ecosystem. Their investments are articulated in different ways in legal terms, but always through an online platform that channels savings to certain projects, chosen and validated, after analysis by the managers of those platforms. It is a form of funding available to everyone. As it is based on small capital contributions, it is possible that the proposed goal will not be reached if the idea fails to attract enough attention.The most popular platforms are: in the USA, Wefunder and StartEngine; in the UK, Seedrs and Crowdcube, in France, Wiseed; in Germany, Seedtach and Aescuevest; and in Spain, The Crowd Angel and Startupxlore, among others.
- Business Angels
They are private investors who provide money and are looking for projects with a high potential for growth and revaluation. They usually look for startups that already have initial metrics that allow them to carry out a minimum analysis. They offer capital investments that generally range between €10,000 and €50,000 for each investor. Many of them are investors with prestige gained through good choices in the past and this allows the startup to gain credibility with other potential investors. In order to minimize risks, co-investments between several Business Angels are increasingly common, which is usually the case at investment forums organized by ESADeban, IESE, and the College of Economists, among others.
- Private Equity
Private capital managed by specialized entities, normally regulated by the CNMV, which consists of providing financial resources on a temporary basis in exchange for a shareholding, although they often also participate through convertible loans (as a bridge to subsequent rounds of financing) or with Venture Debt (debt with relatively high interest rates combined with a small shareholding). VCs generally invest in companies with a strong technological component that have already demonstrated a rapid growth capacity, at least in the local market, and that need more resources to consolidate that market and/or expand internationally. As a general rule, they take a minority stake, they never seek to control the company, but they do seek to have decision-making power in some key issues, such as capital increases, the company's additional indebtedness, the remuneration of entrepreneurs, the approval of accounts, etc.
- Public funding in the form of a loan and grant
Since the development of capital markets for new asset classes, such as venture capital, often takes a long time (no less than 10 or 15 years), governments, such as that of Spain, tend to try, in the meantime, to contribute to this process by creating institutions that promote access to public loans (in some cases partially subsidized) in various modalities. Pure grants are another alternative for financing startups, but access to these grants depends on the location of the project, the degree of innovation, the profile of the entrepreneur or the activity of the business. Given the diversity of grants, the numerous different requirements, the time of year when they are available, and the associated bureaucratic processes, it is not an easy task to access this type of funding, so in many cases it can be very helpful to have the advice of a partner or financial consulting that can provide you with knowledge and expertise in your application and achievement. There are numerous public funding instruments dedicated to financing startups and ensuring their growth. The best known are the participatory loans of Enisa, the non-refundable grants awarded by CDTI to technology-based startups within the program Neotec, the CDTI PID loans, as well as the calls for European funding for the program Horizon 2020, that seek to promote Research and Development in specific challenges.
- Bank loans
When companies already have sales and can demonstrate a minimum track-record, then there are numerous banks that are willing and have specialized risk units to study granting lines of credit and bank loans to startups. Usually, their first approach is to request personal guarantees from entrepreneurs. From our point of view, offering personal guarantees on the part of an entrepreneur is a serious mistake that we recommend never making, because it can create a burden that is difficult to bear if the company does not end well, as happens in a very large percentage of cases. For this reason, our recommendation to entrepreneurs is to resort to bank loans when the startup already has a balance sheet and an operating account that generates sufficient trust to entities to decide to provide financing without the counterpart of a personal guarantee.All of the forms of financing explained above are good, as long as there is an adequate balance between equity and debt.At Intelectium, we seek to help entrepreneurs first design an optimal capital structure, which does not entail an excessive financial burden that drowns the company throughout its initial development. In this sense, once this dmee capital structure has been defined, we help startups to obtain debt and grants to supplement the private capital resources they have been able to raise, it is a way to boost their growth with the most optimal capital structure possible.Send us your deck and we will study your case in detail to propose a tailor-made solution specific to your company.
