There are multiple types of startups and the new technologies and the current crisis situation have brought some new innovative ways in which an entrepreneur can fund his/her startup. I will use an approach depending on the phase the startup is in.
There are two inputs that show an entrepreneur’s involvement into its startup. As in any other business, I refer to the main axioms, time and money.
Time is the first contribution to a startup, and although it has an intrinsic cost that should be taken into account when starting to sketch your own business plan, already invested time will have no relevance regarding a valuation (it depends mostly in DCF and synergies). However, the time imputed, depending on its opportunity cost, and the future dedication of the team is an asset that can help an entrepreneur get some leverage for future negotiations.
Money, in the other hand, is very tangible and it is what demonstrates better whether the entrepreneur is a chicken or a pig type (as in the eggs and bacon breakfast metaphor).
Friends / Family /Fools
For 99% of first time entrepreneurs, investing their own money is not an option, and in order to get a first demo, MVP or prototype, the startup requires an initial investment. Since the degree of uncertainty at this stage is still sky high, the entrepreneur must look after people in his/her circles of trust that have faith in the project (note the difference between faith and believe). I would recommend not to accept money from those who need it, but are very kind and want to give you a favor. There are no guarantees for money invested in startups. These investors may not be so aware of the high possibilities of losing their investment, or in the best case, getting some money back after an unknown period of time. They should understand this investment as a sunk cost so there is no risk on losing the relationship.
In the entrepreneur circles, people tend to help each other much more than in the corporate world. It is an attitude. Another way to take advantage of this collaboration is to exchange services. I have a financial background and imagine I need a sales plan or a special product design, but I have no money. I could agree to prepare a business plan and a balanced scorecard, or help another entrepreneur to speak with financial institutions… In exchange I could receive a programming work. This is just an example of collaborative ways, and even though it is very hard to find such agreements, I find the following advantages:
1. They do not consume resources. No need to raise capital.
2. There are no taxes included, so the transaction is always more efficient. There are also no overhead costs.
3. You learn from other ventures in similar stages.
4. You test other entrepreneurs that could be a good match for your own startup (I consider the hardest achievement for an entrepreneur to be meeting the right partner).
5. win win situation. There is no need to bargain as if it were a contract. A MOU will suffice. This type of collaboration is more transcendent.
It starts to get serious. When you have exhausted the previous options, you need to find some decent financing to at least try to get the company moving. That means closing the first sales, delivering to several customers, showing the startup can retain these customers and pivoting the product/service until it is ready to pick up the pace with the next ways of financing. By that stage, an entrepreneur MUST be fully aware of the startups weaknesses and know how to minimize them so them don’t become a threat (SWOT analysis 101).
The main advantage of this type of investors is that they are not as demanding in terms of reporting (as we will se in the following points), they tend to diversify much more their investments, and most important of all, they have the most similar long-term motivation as to that of entrepreneurs. They are not so much willing to make a quick buck and believe in the company’s value in the long-term. They each have an exit strategy, which can vary very much depending on the BA, but they are not as aggressive as Private Equity sharks.
By the way, investments can come in the form of money in a bank account, but also in assets, in services, in agreements…, but they can also be as a guarantee. A startup can acquire a bank loan and the investor can provide a guarantee with his/her own assets. The main advantage is that the money is provided by the bank, although the investor is liable for it. The financial cost should also be added. This is not very common, but it can come in handy for certain situations where the investor does not have enough liquidity, but has assets.
Family Office / SCR / Fondo
- Luis Martín Cabiedes (Cabiedes & Partners)
- Iñaki Arrola (Vitamina K)
- Jose María Arquerons
- Jordi Priu
- Angel García (The Emprendedores Fund)
- Tomas Diago (The Emprendedores Fund)
Incubadoras / Aceleradoras
Emprendedores / Business angels
- Martin Varsavsky
- Marek Fodor
- Jesús Monleón
- Jesús Encinar
- François Derbaix
- Axel Serena
- David Tomás
- Eneko Knörr
- Iñaki Ecenarro
- Vicente Arias
- Bernardo Hernández
- Carlos Domingo
- Lluis Faus
- Joan Margenat
- Albert Armengol
- Jesus Perez
- Yago Arbeloa
- Mario Brüggemann
- Alejandro Suarez
- Gustavo García
- Juan Luis Hortelano
- Gonzalo Ruiz
- Marta Esteve
GOVERNMENT GRANTS AND/OR LOANS
Grants that are not linked to a merit are, from my point of view, a waste. However, if they exist, entrepreneurs must know how they work and get the most out of them. Due to the current economic situation, these may not last many more years (personal observation).
Grants: in Spain there are some funds that promote the employment of qualified personnel with a degree. One of these is the loan Inncorpora, which came up in the summer 2012 for only a month. Entrepreneurs have to be on the lookout for the opening of such great opportunities. They compensate for the salary and social security of the employees hired under these premises. Here you may also find a search engine for government grants in Spain.
Loans: also in Spain, ENISA is a great initiative that is holding up despite the severe government cuts. They are loans to startups or tech companies that would find it hard to get financing from other institutions. They have several options, and here is an outline of the conditions as they appear on their website http://www.enisa.es/es/financiacion/info/creacion/enisa-jovenes-emprendedores:
- Ser pyme con forma societaria, constituida, como máximo, en los 24 meses anteriores a la solicitud
- Modelo de negocio innovador/novedoso
- No estar enmarcado en el sector inmobiliario y financiero
- Edad máxima de quienes ostenten la mayoría del capital no superior a 40 años
- Se financiará adquisición de activos fijos y circulante necesario para la actividad
- Aportaciones de socios por importe del 15/25% de la cuantía del préstamo solicitado a ENISA. (25% for loans above 50.000€ and 15% for the rest).
- Préstamo participativo
- Importe mínimo 25.000 €
- Importe máximo: 75.000 €
- Interés mínimo: Euribor + 2,5%
- Interés variable: se determinará en función de la rentabilidad financiera de la empresa, de hasta 4,5% por encima del interés mínimo.
- Comisión apertura: 0,5%
- Vencimiento: máximo 4 años
- Carencia: máximo 6 meses
- Comisión amortización anticipada: 2%
- Sin garantías
They offer some prizes for innovative ideas/projects, loans at good rates or even an investment in the capital. Being that quite important, there are other factors which are very valuable for entrepreneurs:
1. Incubation periods with mentors which allow the startup to shape up its business plan and test the product/service.
2. Reputation. Once the startup receives awards or is selected in camps, it earns prestige it can use to:
a. Attract talent
B. Attract follow-up investors
C. Attract media coverage
D. Use it to talk with financial institutions since it is a validation method of the business plan.
New technological innovations and wide accessibility of the internet have brought on this very interesting way of “selling” your company to a “virtually unlimited” amount of potential investors. Instead of trying to convince few investors for big stakes of the startup, this innovative method allows entrepreneurs to search multiple investors or buyers for a very small stake in the company or a single product. There are 4 types of crowdfunding:
- Equity based: investors get shares. An example is The Crowd Angel
- Donation based: basically used by NGOs. This is not like having a donation Paypal button for donations on your site.
- Lending based: instead of buying shares, the investment is to be repaid depending on some conditions. However, this type of crowdsourcing is not as common since the volatility of startups would require a huge interest rate expected. The loans are commonly made P2P, as for instance, Comunitae.
- Reward based; investors do not expect a returnon their investment. They directly buy a product or service that would be impossible to make if it weren’t for pre-orders with down payments. Examples of this type are Projeggt or Kickstarter.
This is no joke. There are plenty of activities I can think of, but of course we recommend not to engage in anything that may seem unethical o illegal since it can jeopardize the future of the startup, and of course that of the entrepreneur. In startups, the image of the company is the image of the entrepreneur team. Trust is very hard to earn and very easy to lose. Despite the fact that big corporations have been made from drug money, lobbies with governments, bribes, inhuman working conditions, tax evasive maneuvers, etc… We advise you not to risk it.
These are family owned, but necessarily family run businesses. We must consider than some of the best managed companies in Spain are familiar. For instance Inditex and Mercadona. There are also lots of “Hidden Champions”, companies not very popular to the public, but which have managed to secure important recurrent earnings each year. From these cash flows they can invest in complementary activities, but they can also diversify.
Family offices are also formed by the sale of a company and their purpose is then to manage the wealth obtained from the sale. It is always important for entrepreneurs to understand the motivations of the investors.
Family offices can be a good source of funding for startups since they can provide funds with a less aggressive management and can also contribute with involvement from experienced managers, “Smart Money”. However, the type of involvement can be very different from one FO to another, very much depending on the profile and the short-long term focus of the office.
They are very hard to get for a startup. By industrial company I mean a well established corporation that has a direct interest in the sector of activity of the startup or considers the synergies it can obtain from an investment in a startup. The big difference is that they know very well the market, compete on it, and want to make sure they get a strong position in the startup. It is very likely that they would want to acquire a controlling position, directly of through options. That means that there is not going to be much room for a serial entrepreneur in most cases, so I would only recommend this option if there is a guarantee of being able to exploit a certain market segment or a country market. This is the best option for an exit.
The most visible industrial investors are now not industrial companies, but IT monsters such as Google or Facebook.
It is very common to find a GAP between previously described funding sources and the next ones. Generally, Business Angels and other investors have a lower income capability and before a startup jump into the big league we will describe later, there is a huge GAP. In Spain, if the round the entrepreneurs seek is between 500k€ and 2M€, there are not as many options. That can be a big problem and entrepreneurs should take it into account in order not to run out of cash or face Venture Capital before they are prepared to.
Once you have the mold and the startup is ready for scaling, you may seek new rounds with venture firms. These firms must be approached from an early stage. Even if you are not ready to raise capital at the moment, it is advisable to establish contact with a couple of firms so you can get feedback and establish a relationship that can later bring up a partnership with more reliability from both parties.
These firms are experts in dealing with these situations and they are very well aware of the success possibilities. However, they can be very aggressive, imposing heavy reporting requirements and forcing exits at times that are not best for the interest of the company. Negociating the terms of the agreement can be excruciating.
Use as a last resource. They invest in all sort of companies, not only in startups. It is very unlikely they will invest in a startup that does not have a track record over several years. They expect to make a 25% ROI per year, staying around 3 years approx. The mortality rate of their portfolio is lower than that of the rest of the type of firms stated above, and their exit strategy is usually very aggressive. They will do anything in their hands to clean up the balance sheet and pack the company for resale, usually being industrial companies in the same market the ideal potential buyers, or IPOs. These firms implement hands on policies like no other, getting presence in the board, placing their people in top management positions and professionalizing the company in the most efficient way. The good aspect of PE firms is that they reduce fat from companies like no other, but their short term objectives are very distant from that of the founders.
Is there any other way I forgot to mention? Share it with the crowd! Post a comment