Possible Options of Raising Money For Business
Fundraising is a key and often necessary step for the growth of a company. There are many possible options of raising money for business. However, raising funds is an obstacle course and being ill-prepared can be catastrophic in terms of image, deadlines and survival.
You will discover in this article the essentials to know to raise funds whatever your maturity and your ambitions.
When should you raise funds?
It often happens that people invest several k€ in their business, develop it without ever seeking other financing and only go to see funds as soon as they have no more money. These companies have a successful project but find themselves blocked. The development of the company is slowed down while the projects are viable and have potential.
It is fundamental and essential to plan the search for funding upstream of the project.
The financing of a company: it’s like double road humps (bumps)
We can assimilate the financing of a company by using the representation of double road humps. Road humps are traffic calming devices that help in controlling the speed of the vehicles. The two bumps correspond to when the company has cash with a long dip in between.
The first bump corresponds to R&D, birth and survival:
- You will get funding for your idea, and the start of its implementation.
- You can raise up to a few million euros depending on the type of project through competitions, honorary loans, Business Angels or even VC in seed capital.
- The trough corresponds to the first successes and the take-off.
- You have already had financing but now you have to prove that your business will grow.
- It will be more difficult to raise funds at that time.
The second bump corresponds to the continuation of take-off and maturity.
- You have demonstrated that your business is growing, the number of customers is increasing, the turnover is growing, etc.
- You can then turn to development capital or even the financial markets.
- In addition to a financial investment, some partners will provide leaders with skills, contacts, valuable advice and strong expertise. They then participate actively in the life of the company.
The financing phase with public counters
In the phase of seeking funding from public counters, access to the fund is defined by two criteria:
The first, which will condition a large number of aids, is equity. Indeed, aid is often limited to equity: the higher it is, the more financing you will find. On average, for €1 of equity, it is possible to obtain between €0.5 and €1 of financing.
The second criterion is defined by the maturity of the company and its financing needs. Some aid may have specific criteria (date of creation of the company, number of employees, turnover, etc.). For example, to be eligible for the French Tech Scholarship, the company must not have been created more than a year ago and, conversely, for the PTZI, the company must have been created more than of three years.
Do you want to increase your equity before raising funds? Consult our guide on the possible options to increase your equity.
1. Raising funds with crowdfunding
Crowdfunding is no longer a mere fashion effect.
The principle brought to France by My Major Company 10 years ago, was once reserved for the creative and artistic fields.
From its inception, the ambition has always been to enable projects that would have had difficulty emerging via traditional funding channels to see the light of day.
The 2008 economic crisis that we went through greatly contributed to strengthening this funding model and today there are platforms for all types of projects, whether artistic, sporting or entrepreneurial.
Regardless of the level of maturity of the company, whether it is a startup or a well-established SME, everyone can use crowdfunding and find a platform that is suitable for them.
There are different crowdfunding models: it is important to distinguish their differences to choose the most suitable platform for your project.
Funding without financial compensation (reward-based crowdfunding)
This is the most “classic” model. You ask your community to contribute to your campaign and in exchange you give them the right to rewards: a percentage of turnover, thanks, goodies… This model adapts very well to companies that sell products and whose the legal structure does not allow for optimal capital dilution.
The counterparties are all found: your product or its variations. And then, as already mentioned, the presale will make it possible to test its market to launch its production.
Possible fundraising amounts: from €5k to more than €1m
Platforms: Ulule (fr), Kiss Kiss Bank Bank (fr), KickStarter (us), Indiegogo (us)
Equity-based crowdfunding:
Equity crowdfunding allows individuals to invest in the capital of companies, in return the companies sell shares to contributors. It is a model which tends to develop and which has the advantage of putting you in contact with benevolent investors.
Possible fundraising amounts: from €100k to €1m.
Platforms: Smart Angels, Wiseed, Bulb in Town
Lending-based crowdfunding:
Lending crowdfunding connects companies looking for financing and individuals or legal entities who have savings, in return the contributors receive interest. The operation is quite similar to that of the traditional bank loan, but this has the advantage of detaching you from banking institutions and bringing you closer to people who believe in your project.
Possible fundraising amounts: from €10k to €2.5m.
Platforms: Lendopolis, Lendix, Unilen
2. Raising funds from an investment fund
We raise funds from investors gathered in funds commonly called Capital Investissement. They are divided into several categories.
Seed capital
Seed capital mainly concerns the financing of the launch and survival of a company. Not all funds do seed, but some funds have chosen to create seed departments to support the financing of the youngest shoots.
Venture Capital
Venture Capital intervenes for investments on average of around €100,000 up to €10 million. It is generally devoted to financing the survival of the company, its first successes and its take-off.
Growth capital
Development capital comes into play when the company has already been in existence for several years, is growing rapidly and has reached a certain maturity. This investment acts as a “growth accelerator”.
Capital-transmission
The transmission capital is a financing intended to accompany the transmission of its company by stages to the investors of the fund.
What type of fund to turn to?
Some funds are generalists while others are specialized: Technology, Biotech, Medtech, etc. You must therefore combine all the criteria to find the fund that corresponds to your company.
Another factor that can be interesting to take into account when raising funds concerns the maturity of the fund you are going to see. Indeed, investment funds follow a 10-year cycle. They therefore invest in the first years and seek to exit their participations from 7-8 years. Their interests are obviously not the same depending on their maturity. However, they have one thing in common: the risk of dilution.
Unlike Business Angels, investment funds have as their main interest the return on investment. Whether investors take a stake in your business will therefore depend on the amount invested, the negotiation and the risk taken.
Obtaining financing from an investment fund may lead you to change the legal status of your business after raising funds. Check out our dedicated guide to learn more.
3. From Venture capital: how does it work?
Alongside bank financing and emerging participatory financing methods such as crowdfunding, private equity (investment capital) remains a privileged channel for financing SMEs.
As its name suggests, its main purpose is to finance companies with equity, even if the majority of operations consist of buyout operations via Leveraged BuyOut (LBO).
The most widespread forms of private equity are risk capital (or venture capital) on the one hand, designating investments in the creation and development of innovative start-ups, and LBOs on the other, designating the acquisition of majority share of a company through debt financing.
Capital financing: advantages and disadvantages
The benefits of capital financing when starting a business
Capital financing offers advantages for the investor and the business creator:
For the investor
- High remuneration in the event of success and resale of the company but the most risky type of investment.
- Agree to block their savings over several years without guarantee on liquidity.
For the entrepreneur
- Offers a financial resource and a long-term perspective.
- In the order of priority of the various “financiers” of an SME, the shareholders come last.
- The shortcomings of capital financing for the entrepreneur.
Here are the three main disadvantages for the entrepreneur:
- Involves giving up a share of ownership of one’s business;
- Expensive type of financing compared to debt;
- Involves significant and time-consuming work on the valuation of the company.
Ready to raise funds? Check out our guide to When is the best time to raise funds?
Sources: CleverlySmart, Synder, GoFundMe, Seedrs Insights
Photo credit: gorartser via Pixabay
